There has been some degree of concern among regulators during the course of this year with regard tohigh speed algorithmic trading and what certain authorities consider to be the disruptive behavior in which certain traders engage by using algorithms to outpace other market participants.
Today, the US Commodity Futures Trading Commission (CFTC) has brought a successful case against two parties, citing them for engaging in what the CFTC considers to be the disruptive process of spoofing. This is a milestone case, as it represents the first time that a trading firm has been prosecuted under the Dodd-Frank Act’s prohibition of spoofing, which is defined under the act as the illegal practice of bidding or offering with intent to cancel before execution.
Britain’s Financial Conduct Authority (FCA) collaborated with the CFTC on this matter, and has also issued a penalty to the same parties.
One of the reasons that algorithmic trading is on the agenda of regulators is that it facilitates positions to be opened and closed at extremely high speeds, using extremely high technology, therefore giving certain traders a distinct advantage over others.
In this particular case, Panther Energy Trading LLC and its Principal Michael J. Coscia utilized a computer algorithm that was designed to illegally place and quickly cancel bids and offers in futures contracts.
The resultant toxic order flow of firms that use algorithms without contravening any laws has resulted in German regulator BaFIN proposing a mandatory delay in trade execution times to prevent disruptions, and go against latency arbitrage by those with quicker systems and complex automated algorithms.
Certain firms, without any encouragement from regulators, are also considering imposing a latency floor in order to absolve them of any such business. EBS recently embarked on such a consideration.
The CFTC’s order against Mr. Coscia and his firm finds that this unlawful activity took place across a broad spectrum of commodities from August 8, 2011 through October 18, 2011 on CME Group’s Globex trading platform.
The CFTC Order requires Panther and Coscia to pay a $1.4 million civil monetary penalty, disgorge $1.4 million in trading profits, and bans Panther and Coscia from trading on any CFTC-registered entity for one year.
According to the Order, Coscia and Panther made money by employing a computer algorithm that was designed to unlawfully place and quickly cancel orders in exchange-traded futures contracts.
For example, Coscia and Panther would place a relatively small order to sell futures that they did want to execute, which they quickly followed with several large buy orders at successively higher prices that they intended to cancel.
By placing the large buy orders, Mr. Coscia and Panther sought 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 from the small order Coscia and Panther were then offering to sell.
