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 Prosecutors said Michael Coscia, the owner of Red Bank, New
Jersey-based Panther Energy Trading LLC, "spoofed" the market when
he designed two algorithms programmed to create an illusion of
market interest, according to an indictment unveiled last year.
In spoofing, a trader may flood the market with orders to buy
contracts. Once the price moves up, he or she will sell at a higher
price and immediately cancel the bulk of the buy-orders.
Coscia, 53, reaped nearly $1.6 million through orders he placed in
17 markets operated by CME Group Inc and three operated by
London-based ICE Futures Europe, according to the indictment.
His programs, known as "Flash Trader" and "Quote Trader," were
designed to cancel orders within a fraction of a second
automatically.
Coscia denies the allegations, saying he did not engage in any
fraudulent or unlawful trading activity. Coscia entered every order
with the intent to trade it, his lawyer, Steven Peikin of the firm
Sullivan and Cromwell, told a jury in Chicago.
"The prosecutors have just got this case all wrong," Peikin said.
This is be the first time the U.S. Justice Department has taken a
trader to trial for violating the anti-spoofing law, a relatively
new statute that was part of the 2010 Dodd-Frank Wall Street reform
bill.
Defense lawyers say the law is vague and lays the groundwork for
prosecutors to criminalize potentially legitimate trading activity.
Coscia's lawyers suffered a setback earlier this year, though, when
U.S. District Judge Harry Leinenweber refused to toss the indictment
on those grounds.
The government must convince the jury that Coscia intended to spoof
the market. Prosecutors on Monday spent time explaining the basics
of what futures markets are and how they work, laying critical
groundwork to make their case.
"The case will have so much technical detail that it is going to be
very hard for the jury to understand the subject matter of the
case," said Chris Gair of the Gair Law Group, who is not involved in
the case.
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Later this week, traders who operated in the same markets as Coscia
will testify that he disrupted the markets by entering and quickly
canceling large orders, said Renato Mariotti, an assistant U.S.
attorney.
"He flashed them out and then quickly yanked them back," Mariotti
said.
Andrew Vrabel, global head of investigations for CME, testified that
it was common for high-speed traders to cancel orders frequently.
But CME, along with U.S. and U.K. regulators, have fined Coscia and
his firm millions of dollars for manipulating commodities markets.
The criminal case is being prosecuted by a specialized unit formed
in April 2014 out of the U.S. Attorney's Office for the Northern
District of Illinois called the Securities and Commodities Fraud
Section.
Since then, there have only been a few other criminal spoofing cases
filed.
Perhaps the most well-known case came in April, when the Justice
Department and the U.S. Commodity Futures Trading Commission brought
parallel criminal and civil spoofing charges against Navinder Sarao,
a London-based trader accused of market manipulation that
contributed to the May 2010 "flash crash."
Sarao has denied the allegations and is fighting against efforts to
have him extradited to stand trial in Chicago. (Reporting by Sarah
N. Lynch in Washington and Tom Polansek in Chicago; Editing by Lisa
Von Ahn and Alan Crosby)
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