UPDATE 2-US, UK watchdogs fine high-frequency trader $6 million
LONDON, July 22 (Reuters) - Regulators in Britain and the United States fined U.S. trading firm Panther and owner Michael Coscia nearly $6 million for manipulating commodities markets, marking one of the first crack-downs on abuses in automated trading.
Regulators are taking a tougher line on high-frequency (HFT) and other forms of automated trading blamed for exacerbating a so-called "flash crash" on Wall Street in May 2010, when blue chips went briefly into freefall.
High frequency traders use software known as algorithms to dart in and out of markets faster than the blink of an eye.
This is usually legal but Panther Energy Trading and Coscia were using the software to post and then cancel orders to profit from the false impression of activity in the market they had created, the regulators said.
Coscia said he had no comment.
The U.S. Commodity Futures Trading Commission said Coscia placed and quickly cancelled thousands of bids and offers in futures contracts over three months, a method of trading known as layering or spoofing.
The watchdog fined Panther and Coscia $1.4 million and forced them to pay back $1.4 million in illegal profits on trades made between August 8, 2011 and October 18 of that year.
The U.S. watchdog was using new powers under the Dodd-Frank reform of Wall Street. Panther and Coscia were also banned from trading on any CFTC-registered trading platform for year.
"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," CFTC enforcement director David Meister said.
The CME Group Inc also fined Panther $600,000 and ordered the company and Coscia to pay back $1.3 million in illegal profits.
The CME Group said Panther's systems placed 400,000 large orders in 17 markets between August and October 2011 with 98 percent of the orders cancelled. This included oil, natural gas, corn, soybeans, soybean oil and wheat.
Several Panther employees executed transactions using six identification numbers registered to Panther owner and member, Michael Coscia, the CME said.
Britain's Financial Conduct Authority (FCA) fined Coscia nearly $1 million for manipulating commodities markets in Britain, the new watchdog's first penalty on a HFT trader.
The FCA said Coscia used algorithmic software in 2011 to place thousands of false orders for Brent crude, Gas Oil and West Texas Intermediate futures from the United States on the ICE Futures Europe exchange in Britain.
He pocketed $279,920 over a six-week period of trading at the expense of other market participants, mainly other HFT traders.
Coscia is not a member of ICE or authorised by the FCA to trade in Britain, but was able to trade from the United States through a broker that offered direct access to the UK exchange.
The FCA said the penalty reflected the serious nature of the deliberate market abuse and the significant impact on ICE, as well as depriving Coscia of the illegal profit he made.
HFT volumes have come to represent a large chunk of trading on some exchanges and regulators have already moved to inject more transparency into the sector and toughen up rules on direct market access.
"Mr Coscia was cheating the market and other participants," said Tracey McDermott, the FCA's head of enforcement. Coscia received a 30 percent discount on the fine by agreeing settlement under the FCA's executive settlement procedures.
The UK's Financial Services Authority, which the FCA replaced in April, fined Swift Trade 8 million pounds ($12.30 million) in August 2011 for similar trading abuses but this is being appealed.