A high-speed trading firm in New Jersey and its owner agreed on Monday to pay $2.8 million to settle federal charges that they used a disruptive market trading practice that was banned by Congress three years ago.
The Commodity Futures Trading Commission accused Panther Energy Trading and its owner, Michael J. Coscia, of using sophisticated computer algorithms to illegally place and quickly cancel bids on commodity contracts, a practice known as “spoofing.” Panther settled similar charges with British authorities on Monday.
The U.S. settlement, which must be approved by an administrative court, marks the first time that the CFTC has enforced the ban on spoofing put in place by the 2010 Dodd-Frank financial regulation law.
The use of complex algorithms to make trades at blink-of-an-eye speeds has come to dominate the market, attracting scrutiny from regulators in this country and abroad. The CFTC plans to unveil a proposal this summer to potentially regulate operations of high-frequency traders. Last week, the Financial Industry Regulatory Authority sent letters to nearly a dozen such traders asking how they keep their computer codes from malfunctioning. And the Securities and Exchange Commission has taken steps to better understand high-speed trading.
Some market experts say they expect to see more enforcement actions in the future against high-frequency traders, who may feel pressured to adopt more aggressive trading tactics now that the industry’s profits have eroded from their highs in 2009.
“High-speed trading firms in general are more desperate than ever before to find sources of performance, and therefore they are more likely to consider stepping further into the gray zone with certain kinds of tactics,” said Paul Rowady, a senior analyst at TABB Group, a financial research firm.
Panther and Coscia agreed to pay a $1.4 million fine, return $1.4 million in ill-gotten gains and stop trading for a year as part of the settlement, but they did not admit to wrongdoing. Richard T. Reibman, a lawyer representing the firm, declined to comment.
The CFTC alleges that Panther and Coscia engaged in the illegal activity while trading 18 futures contracts — including natural gas, corn and soybeans — on four exchanges owned by CME Group.
For nearly three months in 2011, Panther would place a small order to sell a futures contract, according to the CFTC. It would then place large orders to buy similar futures contracts at higher prices, giving the impression to the market at large that there was big demand. But the firm would then quickly cancel its buy orders as soon as it sold the contracts it wanted to sell.
“The sequence would quickly repeat, but in reverse,” the CFTC said. The company and Coscia would sometimes use the spoofing method hundreds of times in an individual futures contract in a single day, the government said in its complaint.
CFTC Commissioner Bart Chilton said in a statement that Panther was trying to “fake out” other traders and that he wanted a longer ban on trading for the company and its owner.
“Spoofing sends false signals to markets in order to lure prey and game the system,” said Chilton, who coined the term “cheetah” to describe high-frequency traders because of their speed. “The good news is that regulators around the world are starting to catch up with the cheetah traders and we are shutting them down when they violate the law.”
The CFTC said CME also has imposed an $800,000 fine and ordered the return of $1.3 million in ill-gotten gains from Panther and Coscia.
Also on Monday, Britain’s Financial Conduct Authority imposed a $900,000 penalty against Coscia on similar charges. It was the first time that the British regulator has taken an enforcement action against a high-frequency trader, the authority regulator said.