Traders, unlike most investors, can go from being a buyer to a seller in just a few moments. And, with the millisecond trading capability available today, it was only a matter of time before that line became blurred.
Such was the case of Michael Coscia of Panther Trading, who was accused of "spoofing," a high-speed-trading technique where you place a large quantity of buy or sell orders with the intent of canceling them. This effectively blinds real traders in the same way that throwing a handful of sand into an opponent's face would cause them to not see clearly. They think the market is going one way based on all of these orders, which then vanish. This tactic is not only unfair, under the Dodd-Frank financial-overhaul law, it became illegal. Though, the catch is, you have to prove that the person intended to cancel the orders.
Coscia testified before a Chicago jury that he did not intend to cancel the orders he placed in the gold, corn, soybean, foreign-exchange and crude markets, but the jury didn't believe him and convicted him on 12 counts, including the intent to defraud other traders. He faces a maximum of 25 years in prison and a $25,000 fine. Sentencing is set for next year.
In this case, the jury needed only one hour to convict Mr. Coscia of spoofing these markets. The prosecution was able to prove that the computer algorithm used by Panther was built to automatically cancel offers or bids prior to execution.
In sports, head fakes, pump fakes, even feigning an interest in a given player are all part of the game. But with the millisecond trading capability available to today's most sophisticated traders, such tactics can result in minor panic – and major profits (or losses, depending on which side of the trade you're on).
This was the first spoofing case brought to court since Dodd-Frank went into effect. Other cases may follow but I don't think we're going to see wave of guilty verdicts.
From what I've heard from lawyers at the Coscia trial, it was problematic for a New Jersey defendant to take the stand before a Chicago jury. This and prosecutors had a smoking gun : They determined that the algorithm was built to automatically cancel its orders, which proved intent to spoof — not trade.