The Dodd-Frank Act has given regulators new powers to pursue enforcement against such practices. It stipulates that all orders must be entered for the purpose of executing bona fide transactions and if it can be proved that the intent was otherwise this could be considered not only a regulatory violation but also a crime.
Following his 2013 fines, Coscia was last year charged under a federal statute tied to Dodd-Frank by the Department of Justice with six counts of spoofing in the first such case of its kind. His recent bid to have the charges dismissed on the basis that they were unconstitutionally vague was thrown out in mid-April and the case could now go to court.
The outcome of the prosecution has important compliance implications for the derivatives market. A criminal prosecution for spoofing can carry a maximum sentence of 10 years imprisonment and a $1 million fine. Commodities fraud can carry a sentence of 25 years imprisonment.
This should be of serious concern to all firms that trade derivatives with any frequency. The CFTC has tried to bring cases against individuals for spoofing in the past, but the new powers it has been given under Dodd-Frank mean that if this prosecution is successful more could follow.
Asset managers that trade derivatives frequently need to take steps to protect themselves. It can be very difficult to determine the boundaries of what is violative spoofing and what is not, but it will be up to traders themselves to establish the legitimacy of trade cancellations.
Trading in futures and stock options necessarily involves a high level of cancellation, so the burning question is the level at which the suspicion of the regulators will become aroused.
One expert suggests to Euromoney an exact number is far from clear, but a fill rate in the single digits over a few weeks – or even a few days – could be enough to trigger an investigation. Establishing whether trades are exposed to the market for long enough to allow for a real chance of execution will be key.
Coscia’s case is a stark illustration of how far regulatory attitudes to market manipulation have changed: following the initial 2013 fines he was banned from trading for one year. Now he could be facing a decade in jail.