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"Spoofing" as Fraud: A Novel and Untested Theory of Prosecution
In June 2018, we published an article discussing the government's efforts to prosecute defendants who engage in a form of trading activity on commodity futures exchanges known as "spoofing," which the law defines as "bidding or offering with the intent to cancel the bid or offer before execution." See, Jodi Misher Peikin & Brent M. Tunis, "When Is a Bid or Offer a 'Spoof'?," Business Crimes Bulletin (June 2018). In that article, we observed that the failure of the Commodity Futures Trading Commission (CFTC) to define what specific conduct qualifies as spoofing has left market participants uncertain about when cancellation of a bid or offer crosses the line from an acceptable trading strategy to an illegal "spoof." This ambiguity is compounded by the fact that rapid cancellation of orders is prevalent in the commodities markets. See, Richard Haynes & John S. Roberts, CFTC, "Automated Trading in Futures Markets" at 9 (2015) ("[J]ust over 50 percent of market orders are cancelled within half a second, approximately the speed of human reaction.").
Notwithstanding this confusion, the Department of Justice (DOJ) has signaled its intent to pursue spoofing prosecutions aggressively. The lead prosecutor in the spoofing case against New Jersey-based algorithmic trader Michael Coscia described that prosecution as "just the tip of the iceberg." Greg Trotter, "Trader Michael Coscia 1st in nation to be sentenced under 'anti-spoofing' law," Chi. Tribune (July 13, 2016). This ominous proclamation was realized in January 2018, when DOJ announced a "spoofing takedown" bringing a litany of criminal charges, including commodities fraud and wire fraud, against eight individuals alleged to have engaged in spoofing-related activity. See, Press Release, DOJ, "Acting Assistant Attorney General John P. Cronan Announces Futures Markets Spoofing Takedown" (Jan. 29, 2018).
In the months since we published our last article in June 2018, however, several of the defendants in these recent spoofing prosecutions have pushed back, raising arguments that call into question whether the government may properly target spoofing under the commodities-fraud and wire-fraud statutes. In particular, these defendants have argued, among other things, that the government cannot charge spoofing as fraud because spoofing does not involve the making of a false statement — a necessary element of a fraud charge. Rather, the defendants assert that when a trader enters an executable order on an exchange, the only information conveyed to the market is completely accurate, i.e., that the trader placing the order will transact at a certain price and quantity for so long as the order is not cancelled. See generally, United States v. Flotron, No. 17-cr-220 (D. Conn.); United States v. Bases, No. 18-cr-48 (N.D. Ill.); United States v. Vorley, No. 18-cr-35 (N.D. Ill.).
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