On May 14, 2018, the Supreme Court of the United States declined to hear Michael Coscia’s appeal challenging his conviction for spoofing and commodities fraud. “Spoofing” is defined in the Commodity Exchange Act as “bidding or offering with the intent to cancel the bid or offer before execution.” Coscia was the first person convicted for using high-frequency trading to manipulate the securities market in violation of the anti-spoofing statute.

After a week-long trial in 2015, an Illinois federal jury found Coscia guilty of violating several federal statutes in a “spoofing scheme” achieved through high-frequency automated trading. Coscia’s trading algorithm would place a small order at a desired price and one or more large orders on the opposite side of the market. Within milliseconds, the large orders would be automatically cancelled; however the small order would be executed at a price that was manipulated by the large cancelled orders.

On appeal to the Seventh Circuit, Coscia challenged his conviction under several theories, including that the statute was unconstitutionally vague. In affirming Coscia’s conviction, the Seventh Circuit Court distinguished spoofing from legitimate high-frequency trading strategies where orders are intended to be filled when they are placed. By declining to hear the case, the Supreme Court left the Seventh Circuit’s decision intact. Coscia is currently serving his three-year sentence in federal prison in New Jersey.

Following Coscia’s conviction, the Commodity Futures Trading Commission and the Department of Justice have filed numerous enforcement actions and charges for spoofing violations. The Supreme Court’s decision to not hear Coscia’s appeal strengthens the government’s ability to enforce the Commodity Exchange Act’s anti-spoofing provision.

Traders should be aware of the advanced analytics used by regulators to detect potential spoofing transactions. While spoofing requires an intent to cancel an order prior to execution, these detection analytics may not be able to establish intent. Further, investment managers that use automated trading systems should ensure that they have procedures to adequately detect or prevent suspicious trades.

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If you have any questions regarding the matters covered in this memo, please contact any of the partners and counsel listed below or your primary attorney in Seward & Kissel’s Investment Management or Litigation Groups.