The Federal Spoofing Conviction: 8 Things You Should Know

On Tuesday, October 3 a jury convicted Michael Coscia of six counts of commodities fraud and six counts of “spoofing” commodities markets. This ruling has sweeping ramifications for market participants, including traders and hedgers.

Mr. Coscia, of Panther Energy Trading, was accused of entering large orders of futures that he did not intend to execute, in order to lure other market participants into the market and profit on smaller, often opposite, transactions. This activity occurred in 2011. Spoofing is illegal since the Dodd-Frank Act went into effect and was regulated as market abuse in some markets long before Dodd-Frank legislation.

These are eight things market participants should know:

  1. This is the first criminal prosecution related to spoofing the markets. It comes with the potential of $1MM in fines and 10 years in jail for each incident. Sentencing will occur in 2016.
  2. Mr. Coscia’s defense included statements that he intended to execute each and every order placed and only cancelled these orders when the risk profile of the transaction changed.
  3. The defense also claimed that no one was harmed if found fraudulent. They contested that other market participants, such as hedge funds, are sophisticated and understand market risks. Rebuttal included that less sophisticated investors and commercial hedgers can also be caught in the wake of this type of trading activity.
  4. It is largely believed the act of entering and cancelling transactions is a common trading practice to facilitate price discovery and gauge market liquidity. There is a fine line to be monitored.
  5. This verdict sets new and narrower precedent and definition of spoofing. It demonstrates what lines of defense Regulators and Department of Justice will deem inadequate. Appeal is yet to occur.
  6. Common belief in compliance circles is that the ruling may ignite regulators to enact on more assertive pursuit. It also may curtail trading activity and impact liquidity and market prices.
  7. The CME and ICE have market surveillance in place to identify possible spoofing violations and have investigated, warned and in few occasions sanctioned market participants.
  8. All market participants, including commercial hedgers, will need to systematically self-monitor any transaction activity that can be perceived as spoofing.

Though this case was framed by the media as an activity associated with High Frequency and Algorithmic Trading, not honoring bids and offers has long been a violation of open-outcry trading. In fact, the London trader who is accused of spoofing that may have contributed to the flash crash of 2011 was using manual order entries. Regulations against spoofing are also not limited to futures markets. Rules exist in physical commodity, bonds, currency and equity markets.

Some organizations are taking action to protect itself from potential regulatory violation.

They are strengthening oversight with new compliance policies, training programs, mapping rules and regulations to transaction lifecycle activities and implementing algorithms to detect potential market manipulation violations to self-police, document and discipline.

Unfortunately, many others are still latently being reactive to regulators data requests and investigations; exposing their organizations to high investigation costs and potentially large fines and loss of trading privileges.

For more information about this case read:

For more information about Spoofing read my blog:

For help improving your organization’s approach to regulatory compliance, contact me at info@pivotalriskadvisors.com.


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Sid Jacobson works with organizations to improve their risk management and compliance capabilities. With over 25 years of experience driving change and growth for companies engaged in energy and derivatives markets, Sid is known for strategic visioning complemented with a successful track record implementing improved commodity strategies, commercial operations, risk management and regulatory compliance.

Most recently, Sid has helped companies improve their compliance policies and governance structures, transaction lifecycle processes and implement trade surveillance algorithms and case management tools.

Sid is the founder of Pivotal Risk Advisors.