LONDON/NEW YORK Regulators in the United States and Britain fined U.S. trading firm Panther Energy Trading LLC and owner Michael Coscia nearly $6 million for manipulating commodities markets, in the latest crackdown on abuses in high-speed automated trading.
Regulators have been taking a tougher line on high-frequency and algorithmic trading in the wake of the so-called flash crash on Wall Street in May 2010. That was when a free-fall in blue-chip stocks temporarily wiped out $1 trillion in shareholder equity from the markets.
High-frequency trading uses computer algorithms to allow traders to dart in and out of markets faster than the blink of an eye. This is usually legal but Panther and Coscia allegedly used the software to post and then cancel orders to profit from the false impression of activity they had created, the regulators said.
Reached at his office, Coscia declined to comment.
The U.S. Commodity Futures Trading Commission (CFTC) fined Panther and Coscia $1.4 million and ordered them to pay back $1.4 million in illegal profit on trades made between August 8, 2011, and October 18 of that year. It also banned them from trading on any CFTC-registered trading platform for one year.
The Panther scheme allegedly involved placing a small order on one side of the market near the best price available, and then within one-tenth of a second, placing several larger offsetting orders with progressively improving prices. The impression of activity induced others to trade on the side of the large orders, increasing the likelihood that Panther's small order would be filled. The large orders were then canceled.
Monday's action marked the first time the CFTC used new powers under the Dodd-Frank financial reform law to combat the manipulative practice, known as "spoofing."
"Spoofing sends false signals to markets in order to lure prey and game the system," CFTC Commissioner Bart Chilton told Reuters. He said the regulator was currently looking at a variety of violations throughout the market, but could not comment on other investigations.
Panther's alleged bad practices are not a sign that all algorithmic or high-speed traders are disrupting markets, said Gary DeWaal, a former general counsel for Newedge Group, who is now a consultant on financial-services regulatory matters.
"I don't think this is an indictment of the nature of the trader," he said. "This is an indictment of the trading activity."
Exchange operator CME Group Inc, which has some regulatory powers, fined Panther $800,000 which is included in the $6 million in total fines. It ordered the company and Coscia to pay back $1.3 million in illegal profit. The profit paid back under the CME ruling will partially offset the CFTC amount.
CME said Panther placed 400,000 large orders in energy and agriculture markets between August and October 2011 with 98 percent of the orders cancelled.
Several employees of Red Bank, New Jersey-based Panther executed transactions using six identification numbers registered to Coscia, CME said.
In Britain, the Financial Conduct Authority (FCA) fined Coscia nearly $1 million for manipulating commodities markets, the new watchdog's first penalty on a high-frequency trader.
The FCA said Coscia used algorithms in 2011 to place thousands of false orders for energy futures from the United States on the ICE Futures Europe exchange in Britain.
He pocketed $279,920 over a six-week period of trading at the expense of other market participants, mainly other high-frequency traders, the FCA said.
Coscia was able to trade from the United States through a broker that offered direct access to the UK exchange.
The FCA said the penalty reflected the serious nature of the deliberate market abuse. Coscia received a 30 percent discount on the fine by agreeing to a settlement.
High-frequency trading volumes have come to represent a large chunk of trading on some exchanges and regulators have already moved to inject more transparency into the sector and toughen up rules on direct market access.
The Financial Industry Regulatory Authority said last week it sent out targeted examination letters to 10 high-frequency trading firms asking for detailed information on the testing and supervision of trading algorithms and other software.
Separately, Newedge unit Newedge USA LLC agreed this month to pay $9.5 million to settle allegations by FINRA and several exchanges that it did not adequately monitor and prevent potentially manipulative and suspicious trading activity by high-speed traders.
In Britain, the Financial Services Authority, which the FCA replaced in April, fined Swift Trade 8 million pounds ($12.3 million) in August 2011 for trading abuses similar to those at Panther, but this is being appealed.
(Additional reporting by Tom Polansek in Chicago; editing by Louise Heavens, Jane Merriman and Matthew Lewis)