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Judge Declines to Dismiss Spoofing Charges Against High Frequency Trader

On April 16, the US District Court for the Northern District of Illinois denied a motion to dismiss “spoofing” charges against Michael Coscia, a high-frequency commodities futures trader, finding that the indictment was sufficient because it alleged that Coscia placed orders with an intent to cancel them. Coscia is charged with six counts of “spoofing” under the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 and six counts of commodities fraud under the 2009 Fraud Enforcement and Recovery Act.

In August 2011, Coscia developed a high-frequency trading strategy that used specially designed software to enter and cancel a series of large-volume “trade” and “quote” orders in milliseconds. According to the Indictment, this tactic allowed Coscia to manipulate the market to purchase contracts at lower prices or sell contracts at higher prices than the prices available in the market prior to his orders. The indictment alleges that Coscia created a “false impression regarding the number of contracts available in the market…to fraudulently induce other market participants to react,” and that he reaped $1.5 million in profits.

The Commodity Exchange Act, as amended by the Dodd-Frank Act, prohibits “any trading, practice, or conduct … of the character of, or is commonly known to the trade as, ‘spoofing’ (bidding or offering with the intent to cancel the bid or offer before execution).” Coscia argued that the anti-spoofing provision was vague and failed to distinguish “spoofing” from legitimate practices. He maintained that at the time of the alleged conduct there was no commonly understood meaning of “spoofing” in futures trading and the Commodity Futures Trading Commission  was unable to establish rules and had yet to issue final interpretive guidance. He highlighted comments during a CFTC 2010 roundtable discussion regarding the difficulty of defining “spoofing.” Despite the contentious debate between the CFTC and the industry over what constituted unlawful “spoofing” at that time, the District Court rejected his challenge to the statute. The District Court found that because the indictment tracked the statute by alleging that orders were placed with an intent to cancel them, this set Coscia’s conduct apart from legal trading practices.

U.S. v. Coscia, No. 1:14-cr-00551 (N.D. Ill. Apr. 16, 2015)

©2020 Katten Muchin Rosenman LLPNational Law Review, Volume V, Number 116


About this Author


Margaret McQuade concentrates her practice on matters of employment law and executive compensation, with an emphasis on negotiating and drafting a wide range of agreements, and mediating and arbitrating claims on behalf of both employees and employers.