Justice brings ‘spoofing’ charges against flash trader

The Justice Department announced Thursday it had brought first-ever charges against a high-frequency trader for manipulating prices in commodity markets.

Calling it the first federal prosecution of its kind, the Justice Department said it had charged a New Jersey-based trader with six counts of commodities fraud and six counts of “spoofing,” stating he reaped nearly $1.6 million in ill-gotten profits.

{mosads}The case marks the first time the government has brought charges under an “anti-spoofing” provision included in the Dodd-Frank financial reform law.

“Traders and investors deserve a level playing field, and when the field is tilted by market manipulators, regardless of their speed or sophistication, we will prosecute criminal violations to help ensure fairness and restore market integrity,” said Zachary Fardon, U.S. attorney for the North District of Illinois.

“Spoofing” occurs when a high-frequency trader uses computer algorithms to create a large set of orders and then immediately cancels it. The perceived, but artificial, spike in demand allows the trader to then reap a profit.

The department alleges that Michael Coscia, the manager and sole owner of Panther Energy Trading, used the technique to manipulate markets so he could purchase commodities contracts at a lower price and then pull markets in the opposite direction to sell them at a profit.

The case comes as the practices of high-frequency traders has come under government scrutiny. The use of high-tech tools to make trades in milliseconds has attracted attention and controversy amid concerns the techniques could be used to gain an unfair advantage in financial markets.

Attorney General Eric Holder announced in April that his team was looking into the practice, to determine if any flash traders were violating insider trading laws.

Each fraud charge against Coscia carries a maximum sentence of 25 years in prison and a $250,000 fine, and each spoofing charge carries a maximum penalty of 10 years in prison and a $1 million fine. The case now heads to the U.S. District Court in Chicago.