A federal grand jury in Chicago recently indicted high-frequency trader Michael J. Coscia for “spoofing,” making it the first criminal case ever brought under the Dodd-Frank Act’s rules against disruptive trading practices. Dodd-Frank defines “spoofing” as “bidding or offering with the intent to cancel the bid or offer before execution.”

The indictment alleges that Mr. Coscia, former owner of Panther Energy Trading LLC, entered large orders with the intent to cancel them before they could be executed. As a result, the trades purportedly moved the markets in a direction favorable to Mr. Coscia, enabling him to purchase contracts at prices lower than, or sell contracts at prices higher than, those available in the market before he entered and canceled his large-volume orders. According to the government, Mr. Coscia profited nearly $1.6 million from his trading scheme.

Although this is the first criminal case under Dodd-Frank’s anti-spoofing provision, regulators already have brought several civil actions related to “spoofing.” In addition to the Commodity Futures Trading Commission’s (CFTC) parallel action against Mr. Coscia last year, which resulted in a total fine/disgorgement figure of $2.8 million and a one-year trading ban, the CFTC won a consent order the same day Mr. Coscia was indicted that requires another trader to pay $1.56 million to settle allegations that he entered noncompetitive trades and engaged in “spoofing.”

The Securities and Exchange Commission also has been historically active in this area, charging numerous individuals and firms with “spoofing” under the Securities Exchange Act. Others that penalize “spoofing” include the Financial Industry Regulatory Authority, various exchanges, and foreign regulators.

Now more than ever, it is important for firms and individuals to understand what is prohibited under the anti-spoofing rule. While the CFTC has provided some additional guidance, uncertainty remains in interpreting Dodd-Frank’s definition of “spoofing.”

If you have any questions about how Dodd-Frank’s anti-disruptive practices provision may affect you or your firm, please contact Henry E. Hockeimer, Jr., at 215.864.8204 or hockeimerh@ballardspahr.com, Charles A. Stillman at 212.223.0200 x8015 or stillmanc@bssfny.com, or the Ballard Spahr attorney with whom you work. 


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