In the realm of financial criminal investigation, the term “spoofing” refers to the use of computer algorithms to manipulate markets by placing large orders in order to alter the price of a security, then quickly canceling the order. The 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act amended the Commodity Exchange Act, 7 U.S.C. § 1 et seq., to add anti-spoofing provisions. Federal prosecutors have charged a commodities trader with multiple counts of commodity fraud and spoofing, in what is reportedly the first case brought under the amended law. United States v. Coscia, No. 1:14-cr-00551, indictment (E.D. Ill., Oct. 1, 2014). The case raises interesting questions about how computer programs could influence criminal cases.
The defendant is involved in high-frequency trading (HFT), a type of securities trading that is almost completely automated and that operates at speeds typically measured in thousandths of a second (milliseconds). Traders rely on computers with fast processing equipment and high-speed network connections. The most successful high-frequency traders are often the ones with the fastest equipment and the clearest digital connection to the markets. HFT has been the subject of a great deal of criticism because it can cause the information available to ordinary investors to become obsolete before it even reaches their computers.
According to the federal indictment, the defendant created two computer programs that he used to trade in commodities markets in Chicago and London. These programs allegedly used algorithms to place large numbers of orders for futures contracts and then canceled them in a matter of milliseconds. Other traders would see a high volume of orders, either bids to buy futures contracts or offers to sell them, creating “a false impression regarding the number of contracts available in the market.” Coscia, indictment at 3. This would then “move the market in a direction favorable to” the defendant. Id. He allegedly made nearly $1.6 million from this strategy from August through October 2011. In 2013, the defendant and his company were fined $2.8 million by the U.S. Commodity Futures Trading Commission, and about $900,000 by the Financial Conduct Authority in the United Kingdom.
In the present case, prosecutors charged the defendant with six counts of commodity fraud, 18 U.S.C. § 1348; and six counts of spoofing, 7 U.S.C. §§ 6c(a)(5)(C), 13(a)(2). A key element of the anti-spoofing statute is the requirement that the defendant acted knowingly. In a sense, the algorithms allegedly used by the defendant are themselves defendants in this case. The government does not have to prove that the defendant specifically designed the algorithms to engage in spoofing, but it does have to prove that he used the algorithms knowing that they were likely to do so.
Some algorithms have already caused legal problems for their programmers in areas like privacy and criminal law. This raises an interesting question, if not in this case, then in some future case: as algorithms get smarter, can they pose unforeseen and ever-more-serious legal consequences for their creators?
Michael J. Brown, a board-certified west Texas criminal defense attorney, has fought to defend people’s rights against alleged criminal charges in federal and state courts for over 20 years. To schedule a confidential consultation with an experienced and skilled advocate, contact us today online or at (432) 687-5157.
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