High Frequency Trader “Spoofs” And “Layers” His Way To Penalties From U.S And British Regulators

by Stinson Leonard Street - Dodd-Frank and the Jobs Act

On July 22, 2013, regulators from the United States Commodity Futures Trading Commission (CFTC) and the British Financial Conduct Authority (FCA) fined high frequency trader Michael Coscia (and his firm Panther Energy Trading) for engaging in spoofing transactions for the purpose of layering bids or offers. As we have previously written, a “spoof” occurs when a trader bids or offers with the intent—and intent is the key to a spoof—to cancel the bid or offer prior to execution. In this case, Coscia spoofed by placing algorithmic bids or offers on Globex, which he intended to, and did, cancel prior to execution.

Coscia spoofed to engage in layering. The FCA described layering as placing small orders and then larger orders to create a false impression of liquidity. Then the larger orders were cancelled, which induced the market to trade the small orders. The FCA said:

Coscia’s layering strategy typically meant placing a small order, which he intended to trade on one side of the order book, followed by a series of large orders on the opposite side of the order book, which were not genuine. These larger orders—typically 20 times the average size of orders placed by other market participants—were designed to create a false and misleading impression of liquidity for those products, and induce the market to trade the smaller orders. The execution of the small order would then trigger the immediate cancellation of the large orders. This pattern would then be repeated on the opposite side of the order book in order to make a profit from price movements generated by the trading strategy. FCA fines US based oil trader US $903K for market manipulation Financial Conduct Authority Press Release at note 3.

The CFTC described the spoofing and layering strategy in the context of trading Light Sweet Crude Oil futures. The strategy was to use large orders—which were intended to be cancelled—to induce the purchase of a small sell order at a profit (and at the expense of other high frequency traders or traders using algorithmic and/or automated systems.)

  1. The algorithm placed a relatively small order on one side of the market at or near the best price being offered to buy or sell, in this instance a sell order for 17 contracts at a price of $85.29 per barrel, which was a lower price than the contracts then being offered by other market participants.
  2. Within a fraction of a second, Coscia entered orders to buy a relatively larger number of Light Sweet Crude Oil futures contracts at progressively higher prices: the first bid at $85.26, the second bid at $85.27, and the third bid at $85.28. The prices of these bids were higher than the contracts then being bid by other market participants.
  3. Coscia placed the large buy orders to give the market the impression that there was significant buying interest, which suggested that prices would soon rise, raising the likelihood that other market participants would buy the 17 lots he was then offering to sell.
  4. But Coscia entered into the large buy orders with the intent that these buy orders be cancelled before the orders were actually executed.
  5.  This strategy sought to capture an immediate profit from selling the 17 lots. As the CFTC concluded, “if the program successfully filled the small 17-lot sell order, the large buy orders were immediately cancelled and the algorithm was designed to promptly operate in reverse. That is, the algorithm would then enter a small buy order in conjunction with relatively large sell orders at progressively lower prices, which sell orders Coscia intended to cancel prior to execution.” In the Matter of: Panther Energy Trading LLC and Michael J. Coscia, CFTC Docket No. 13-26, Order Instituting Proceedings Pursuant to Section 6(c) and (d) of Commodity Exchange Act, as Amended, Making Findings and Imposing Remedial Sanctions, July 22, 2013, at 3.

For this activity, the FCA fined Coscia and Panther approximately $900,000, the first time the FCA has taken enforcement action against a high frequency trader. The CFTC fined them $1.4 million, ordered disgorgement of $1.4 million and prohibited them from trading on any registered entity for one year.

The one-year trading ban could have been higher. Referring to high frequency traders as “cheetahs” because of their speed, CFTC Commissioner Bart Chilton argued for a much more significant trading ban to “protect markets and consumers, and to act as a sufficient deterrent to other would-be wrongdoers.” Concurring Statement of Commissioner Bart Chilton in the Matter of Panther Energy Trading LLC and Michael J. Coscia at 1. He said, “[i]n today’s cheetah trading world where identities can be cloaked behind technology, a year trading ban might simply be a nice sabbatical for a cheetah trader to work on some new algo[rithm] programs to unleash after the trading ban has expired.” Id.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Stinson Leonard Street - Dodd-Frank and the Jobs Act | Attorney Advertising

Written by:

Stinson Leonard Street - Dodd-Frank and the Jobs Act

Stinson Leonard Street - Dodd-Frank and the Jobs Act on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Custom Email Digest
Privacy Policy (Updated: October 8, 2015):

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.


JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at info@jdsupra.com. In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at: info@jdsupra.com.

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.