In recent weeks, a number of developments related to trade “spoofing” should indicate to market participants, in no uncertain terms, that regulators remain vigilant about potentially improper trade practices. “Spoofing” is generally defined as the entry of purchase or sale orders in the market without the intent that they be executed, but rather with the intent to affect the price of commodities to benefit the trader. The Dodd-Frank Act revised the Commodity Exchange Act to add a provision that specifically prohibits spoofing and, in September 2014, the Chicago Mercantile Exchange adopted a specific rule regarding such conduct. In connection with its new Rule 575, CME has also outlined a number of circumstantial hallmarks of spoofing, and closely monitors activity in its trading platform to take action against spoofing when necessary. Other exchanges have followed suit.
In October 2014, the U.S. Attorney in Chicago charged Michael Coscia with criminal conduct related to spoofing. On April 16, U.S. District Judge Harry D. Leinenweber in the Northern District of Illinois ruled that the anti-spoofing statute was not, despite Coscia’s argument, “hopelessly and unconstitutionally vague.” Thus, the first criminal case to use the anti-spoofing and anti-fraud provisions of Dodd-Frank may proceed.
Even more recently, on April 21, 2015, the U.S. Commodity Futures Trading Commission announced a civil action against U.K. citizen Navinder Singh Sarao and his trading firm, for spoofing and manipulation in the S&P 500 E-Mini market. The U.S. Attorney also filed criminal charges against Sarao, who has been arrested in London and is currently fighting extradition charges.
Regulatory interpretive notices recognize that valid orders, entered with the intent that they be consummated, may of course be cancelled when market conditions or other legitimate factors so warrant. Nonetheless, traders and trading firms – particularly those engaged in high-frequency trading – must be mindful of the implications of their high cancellation rates, particularly in light of the increased scrutiny that their trading will undoubtedly attract.