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With First Ever Criminal "Spoofer" Conviction, HFTs Issue Warning: "Outsmart Us, And You Go To Jail"

Just one day before Virtu reported its best quarter yet thanks to the August 24 ETFlash crash (which it may or may not have been instrumental in unleashing), history was made yesterday in a federal courthouse in Chicago Jurors when, in the first criminal spoofing trial on US soil, commodity trader Michael Coscia, owner of New Jersey-based Panther Trading, was found of six counts of commodities fraud and six counts of spoofing. When sentenced, Coscia faces as long as 25 years in prison on the most serious counts.

While we have previously profiled the case, here is a reminder on Coscia's bacgkround courtesy of Bloomberg: he grew up in Brooklyn. His father was a subway token clerk and he was the first in his family to go to college. During the day he was a mail carrier and went to Brooklyn College at night and graduated with a business management degree in 1986. He has been married for 25 years and his son attends the University of Michigan.

He testified that he first became interested in the markets after his father bet on a horse race and turned a $2 bet into a $55,000 winner. His father put the profit in the market and Coscia tracked his father’s investments, sparking his interest in finance.

Coscia had a cousin who worked on the floor of the New York Mercantile Exchange and that’s how he got started on the floor, beginning as a clerk. He was a trader for 27 years.

What happened then is the same thing that happened with the other two notorious "spoofers" who have gained prominence in the recent year, Nav Sarao and Igor Oystacher: they got too good. So good in fact the HFTs - mostly Citadel - were consistently losing money to them. As a result, Coscia et al had to be punished.

He was accused of entering large orders into futures markets in 2011 that he never intended to execute. His goal, prosecutors said, was to spoof, or fool other traders to markets by creating an illusion of demand so that he could make money on smaller trades. Prosecutors said he illegally earned $1.4 million in fewer than three months in 2011 through spoofing.

Bloomberg has more details:

Prosecutors focused on six transactions, all from 2011, in the gold, euro, soybean meal, soybean oil, British pound, and copper futures markets. In total, these trades resulted in a profit of $1,070, according to the testimony. Prosecutors said Coscia conducted thousands of such trades.


Coscia’s trading showed that he would first place a small order and then large orders on the other side of the market that were subsequently canceled after he executed smaller trades, according to testimony by Federal Bureau of Investigation special agent Brent Potter.


Computer programmer Jeremiah Park testified about trading algorithms he created under Coscia’s direction. Those programs included “quote” orders designed to “pump up market,” according to Park’s notes that were shown in court. The quote orders were to stimulate the market to get a reaction, Park testified.

Orders to "pump up the market"? We wonder if the NY Fed in its joint ventura with the biggest spoofer in the world, Citadel, has ever heard of those?

As reported by Reuters, Coscia's firm had fewer than 10 employees. However, he "entered more large orders than anyone else in the world" in nearly a dozen CME Group Inc markets ranging from corn and soybeans to gold after he began using two algorithmic trading programs in August 2011, prosecutors said during the trial.

To be sure Coscia disagreed with the accusation: he testified that he didn’t do anything wrong and repeatedly said he intended to trade on every order he placed. He also said he traded a lot of large orders he placed. He was asked whether he fraudulently induced other market participants to react to the deceptive market information he created.

“I didn’t induce anyone,” Coscia said. “There’s no deceptive market information either.”

Technically, he is right - he did not induce anyone. He induced a whole of anythings, mostly countless HFT algos that reacted to his orders by pushing the market in the direction of his orderflow, only to be "spoofed."

At which point the case really boiled down to just one thing: not whether it is legal to spoof, which it is and yet massive, well-connected HFT firms get away with it every single day, but whether it is legal to take advantage of HFT algos programmed to do just one thing - frontrun orders, and activity which leads to massive losses for the algos and the Citadels behind them, when the spoofer realizes just how dumb his counterparty truly is.

* * *

The verdict was clear: nobody is allowed to outspoof the spoofers.

Here is the punchline from the lobby of very group of people who take advantage of broken markets every given day:

"Investors are better off when spoofers who prey on high-frequency traders are brought to justice," said Bill Harts, chief of the Modern Markets Initiative, a group representing high-frequency and algorithmic traders.

Funnier words have rarely been spoken by the person whose "Modern Markets" Initiative has made real modern markets a farcial disaster.

And so the gauntlet has been thrown: anyone who dares to make money by "abusing" the dumb logic of Citadel algos will go to jail.

"This is the clarity that people have been looking for - what exactly is spoofing, what defines it," said Trace Schmeltz, an attorney specializing in white-collar crime at law firm Barnes & Thornburg who was not involved in the case.


"The defendant's trading activities disrupted the markets in his favor and against legitimate traders and investors," said Zachary Fardon, U.S. Attorney for the Northern District of Illinois.

Such as... high-frequency traders.

And the biggest irony: Steven Peikin, one of Coscia’s lawyers, argued that high-frequency traders routinely canceled orders. He told the jury that Coscia’s trading strategy was unique but not illegal.

Wrong: it is illegal, but he is absolutely right that everyone does it, especially the HFTs. But doesn't matter - next year Coscia will be back in court to hear just how many years he will spend in prison.

As for the HFTs... well, we already showed just what their "punishment" is when as reported earlier, Virtu reported record revenue in US equity trading in the third quarter...