Market Matters Blog
Katie Micik DTN Markets Editor

Monday 07/22/13

Spoofing Leads to Ban, But Is It Long Enough?

The Commodity Futures Trading Commission earns a frequent mention in this space, especially after the passage of the Dodd-Frank financial reforms in 2008 when the CFTC gained some huge new responsibilities (but few new resources) to help it beefed up enforcement. It's had a fair share of struggles. With Congress currently in the process of reauthorizing the CFTC, every move it makes takes on a heightened sense of importance.

I rarely report on CFTC disciplinary actions, but this one is worth noting because it weaves into one of the core conversations surrounding the reauthorization process: what about high-speed, algorithmic traders.

Panther Energy Trading LLC, a high-speed trading firm based in New Jersey, used its sophisticated computer programs to "spoof" the market, earning $1.4 million on the trades in oil, corn, wheat and soybean complex futures contracts. A trader, Michael J. Coscia, was also charged.

"While forms of algorithmic trading are of course lawful, using a computer program that is written to spoof the market is illegal and will not be tolerated. We will use the Dodd Frank anti-disruptive practices provision against schemes like this one to protect market participants and promote market integrity, particularly in the growing world of electronic trading platforms," said David Meister, the CFTC's Enforcement Director, in a press release.

Now to an even better question: what's spoofing? Essentially, it's when one person places bids and offers with the intention of cancelling them before execution.

Here's what CFTC said Panther did: "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, 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. Although Coscia and Panther wanted to give the impression of buy-side interest, they entered the large buy orders with the intent that they be canceled before these orders were actually executed. Once the small sell order was filled according to the plan, the buy orders would be cancelled, and the sequence would quickly repeat but in reverse -- a small buy order followed by several large sell orders. With this back and forth, Coscia and Panther profited on the executions of the small orders many times over the period in question."

The Senate Agriculture Committee held a hearing on reauthorizing the CFTC last week, and while a lot of it focused on implementing Dodd-Frank and on enhancing customer protections, high frequency traders were a part of the conversation too.

"Increasingly, traditional customers of agricultural futures markets are concerned about the impacts of high-frequency trading," Scoular's John Heck testified on behalf of the National Grain and Feed Association. Volatility around major crop reports has led many hedgers to avoid the markets at those times, and "concerns also have been raised about the impact of high-frequency trading on order fills for traditional hedgers and about timely access to USDA reports, especially for those without mega-high speed connections."

Heck posed a series of question about whether or not high frequency traders should be required to post margin, register with the CFTC, etc. Another question that often comes up in the high frequency trader discussion: what's an adequate punishment?

In the case of Panther, it's a one-year trading ban, disgorgement of the $1.4 million gains and a $1.4 million fine. CFTC Commissioner Bart Chilton issued a statement alongside today's disciplinary notice that said he agreed with the fines but thought a longer trading ban was necessary.

"Additionally, these types of violations of the law are becoming more common with the advent of high frequency traders (HFTs) -- traders I've termed "cheetahs" due to their incredible speed. The cheetahs are to be commended for their innovative strategies, at the same time, when they violate the law, regulators need to be firm and resolute in our desire to deter such activities. Regulators already have a tough time keeping up with the cheetahs. Without sufficient deterrents, such as meaningful trading bans, many trading cats will simply find other ways to get back to their market hunting grounds. In years past, for example, a trader who was banned for a year from trading might as well consider it a lifetime ban. People on the trading floor would know, customers would know. People wouldn't want to do business with the trader. In 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 programs to unleash after the trading ban has expired."

If you would like to read the CFTC's order, you can find it here:…

The House subcommittee on General Farm Commodities and Risk Management will be holding two days of hearings this week. Tomorrow morning, two CFTC commissioners will be testifying. On Wednesday, CHS Hedging's president Scott Cordes and other business leaders will take the stage.

Posted at 11:50AM CDT 07/22/13 by Katie Micik
Comments (2)
These rogue cheetahs are like speeders. For every one the CFTC can catch, there may be 50 more that get by with these tactics. These high speed trading tactics have clearly distorted the fundamentals of the commodities. The CFTC can reduce the risk to the commodity markets associated with these cheetahs by implementing rules to require legitimate orders to stay in place until a break in the trading session (7:45 am or 1:15pm) or until filled, whichever comes first.
Posted by KC ... at 3:09PM CDT 07/25/13
These rogue cheaters (cheetahs are a respected animal) are one thing but how about J. P Morgan-Chase? When the government threatens an investigation into their commodity trading the big bank says, "Whoops! We were just leaving!" and proceeds to try to sell the seat on the trading floor they've had since the Bush administration let these huge money interests trade. When they have the influence to run the market merely by huge volumes of purchasing (up) and then taking their own profits on the run up with large volume selling (down) they have more going on than honest supply and demand.
Posted by Bruce Hanson at 9:12AM CDT 07/29/13
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