The Chicago high-frequency trading firm HTG Capital Partners is suing rival traders, claiming that “John Doe defendants” engaged in spoofing to manipulate the market. The illegal practice was outlawed in 2010 under the Dodd-Frank Act. Spoofing involves attempting to deceive market participants into thinking large orders for futures contracts are being made to get others to make trades.
The practice may involve a trader making large orders for selling or buying and then canceling the orders right away and doing the opposite. However, the fake bids and offers make it appear as if prices are moving. This lets trading algorithms take advantage of the slit-second changes that occur. Those who are spoofed end up selling for less or buying for more than they wanted.
HTG is seeking $100,000 in damages and wants CME Group, the derivatives exchange where the alleged spoofing occurred, to identify the defendants. High-frequency trading provides the cloak of anonymity. CME, which owns the New York Mercantile exchange and the Chicago Mercantile Exchange, is the largest futures market in the world.
The plaintiff firm claims that it experienced an “unmistakable pattern” of “build-ups, cancels and flips” that went on repeatedly for more than twenty moths. HTG contends that CME let close to 7,000 spoofing instances occur in less than two years—and this does not include other times that the firm may not have identified. It is alleging wrongdoing through August 2014, which was when CME implement its new rules.
Last year, CME put out new rules that prohibited “disruptive trading practices,” including spoofing. Not long after, the Commodity Future s Trading Commission ordered the exchange to come up with strategies to better identify and deal with spoofing.
In August, HTG filed an arbitration claim accusing Allston Trading LLC, also a high-frequency trading firm, of manipulating prices. This also purportedly occurred on a CME exchange. The claimant contended that Allston displayed a pattern of canceling offers and bids to deceive other traders into moving prices in a way that favored Allston. A spokesperson for Allston disputes the claims.
Last year, the U.S. Department of Justice filed criminal charges against Michael Coscia for spoofing. He was accused of making orders that he intended to cancel to artificially drive prices up or down so he could trade. Coscia, who ran the high frequency trading firm Panther Energy Trading, settled civil charges with the CFTC in 2013 by paying a $2.8 million penalty and disgorgement and a $900,000 penalty to Britain’s Financial Conduct Authority. According to the indictment, Coscia’s trading strategy made close to $1.6 million in profit and he allegedly engaged in thousands of trades.
SSEK Partners is an institutional investor fraud law firm.
High-Frequency Trading Lawsuit: Algorithmic Traders Sue Other ‘Flash Boys’ Over ‘Spoofing’, Institutional Investor Securities Blog, International Business Times, March 16, 2015
Spoofing “ a New Crime With a Catchy Name, NY Times, October 16, 2014
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