Michael Coscia, the first person convicted as a “spoofer” under the 2010 Dodd-Frank Act, has been sentenced to 3 years in prison. Coscia is not a young hacker kid or even a computer whiz, he is a fifty-four-year-old commodities trader and owner of New Jersey-based Panther Energy Trading.
Coscia was convicted in November 2015 for artificially bumping up commodities prices by using computer algorithms to quickly place large orders through commodity markets in Chicago and London which he then cancelled within milliseconds. These placed-then-cancelled trades were alleged to have had effects on the pricing of the commodities that benefitted Coscia to the tune of more than $100,000 per month in 2011.
In April 2015, the U.S. Commodities Futures Trading Commission brought Dodd-Frank spoofing charges against a London-based trader named Navinder Sarao, accused of market manipulation that allegedly contributed to the “Flash Crash” of May 2010 which briefly sent the Dow Jones Industrial Average down more than 1,000 points and netting Sarao $40 million. Navinder has resisted extradition to the U.S. from the U.K.
Law enforcement is catching up with spoofing, learning how better to identify likely spoofing transactions. The difficulty is proving the alleged spoofer’s intent with respect to the use of the computer algorithms. A spoofed trade might have a trader place a small order, and then a much bigger order, in hopes that market attention to the large order will cause the small order to be snatched up (and the second larger order is cancelled). Cosia argued that he intended to complete every trade he placed — prosecutors must prove the defendant did not change their mind about the trade for legitimate reasons. Cosia may appeal his conviction in part on that basis. Expect to see a ramp-up of spoofing cases as regulators seek to demonstrate to major market players that this high-tech manipulation is under control.