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With First Ever Criminal "Spoofer" Conviction, HFTs Issue Warning: "Outsmart Us, And You Go To Jail"

Tyler Durden's picture




 

Just one day before Virtu reported its best quarter yet thanks to the August 24 ETFlash crash (which it may or may not have been instrumental in unleashing), history was made yesterday in a federal courthouse in Chicago Jurors when, in the first criminal spoofing trial on US soil, commodity trader Michael Coscia, owner of New Jersey-based Panther Trading, was found of six counts of commodities fraud and six counts of spoofing. When sentenced, Coscia faces as long as 25 years in prison on the most serious counts.

While we have previously profiled the case, here is a reminder on Coscia's bacgkround courtesy of Bloomberg: he grew up in Brooklyn. His father was a subway token clerk and he was the first in his family to go to college. During the day he was a mail carrier and went to Brooklyn College at night and graduated with a business management degree in 1986. He has been married for 25 years and his son attends the University of Michigan.

He testified that he first became interested in the markets after his father bet on a horse race and turned a $2 bet into a $55,000 winner. His father put the profit in the market and Coscia tracked his father’s investments, sparking his interest in finance.

Coscia had a cousin who worked on the floor of the New York Mercantile Exchange and that’s how he got started on the floor, beginning as a clerk. He was a trader for 27 years.

What happened then is the same thing that happened with the other two notorious "spoofers" who have gained prominence in the recent year, Nav Sarao and Igor Oystacher: they got too good. So good in fact the HFTs - mostly Citadel - were consistently losing money to them. As a result, Coscia et al had to be punished.

He was accused of entering large orders into futures markets in 2011 that he never intended to execute. His goal, prosecutors said, was to spoof, or fool other traders to markets by creating an illusion of demand so that he could make money on smaller trades. Prosecutors said he illegally earned $1.4 million in fewer than three months in 2011 through spoofing.

Bloomberg has more details:

Prosecutors focused on six transactions, all from 2011, in the gold, euro, soybean meal, soybean oil, British pound, and copper futures markets. In total, these trades resulted in a profit of $1,070, according to the testimony. Prosecutors said Coscia conducted thousands of such trades.

 

Coscia’s trading showed that he would first place a small order and then large orders on the other side of the market that were subsequently canceled after he executed smaller trades, according to testimony by Federal Bureau of Investigation special agent Brent Potter.

 

Computer programmer Jeremiah Park testified about trading algorithms he created under Coscia’s direction. Those programs included “quote” orders designed to “pump up market,” according to Park’s notes that were shown in court. The quote orders were to stimulate the market to get a reaction, Park testified.

Orders to "pump up the market"? We wonder if the NY Fed in its joint ventura with the biggest spoofer in the world, Citadel, has ever heard of those?

As reported by Reuters, Coscia's firm had fewer than 10 employees. However, he "entered more large orders than anyone else in the world" in nearly a dozen CME Group Inc markets ranging from corn and soybeans to gold after he began using two algorithmic trading programs in August 2011, prosecutors said during the trial.

To be sure Coscia disagreed with the accusation: he testified that he didn’t do anything wrong and repeatedly said he intended to trade on every order he placed. He also said he traded a lot of large orders he placed. He was asked whether he fraudulently induced other market participants to react to the deceptive market information he created.

“I didn’t induce anyone,” Coscia said. “There’s no deceptive market information either.”

Technically, he is right - he did not induce anyone. He induced a whole of anythings, mostly countless HFT algos that reacted to his orders by pushing the market in the direction of his orderflow, only to be "spoofed."

At which point the case really boiled down to just one thing: not whether it is legal to spoof, which it is and yet massive, well-connected HFT firms get away with it every single day, but whether it is legal to take advantage of HFT algos programmed to do just one thing - frontrun orders, and activity which leads to massive losses for the algos and the Citadels behind them, when the spoofer realizes just how dumb his counterparty truly is.

* * *

The verdict was clear: nobody is allowed to outspoof the spoofers.

Here is the punchline from the lobby of very group of people who take advantage of broken markets every given day:

"Investors are better off when spoofers who prey on high-frequency traders are brought to justice," said Bill Harts, chief of the Modern Markets Initiative, a group representing high-frequency and algorithmic traders.

Funnier words have rarely been spoken by the person whose "Modern Markets" Initiative has made real modern markets a farcial disaster.

And so the gauntlet has been thrown: anyone who dares to make money by "abusing" the dumb logic of Citadel algos will go to jail.

"This is the clarity that people have been looking for - what exactly is spoofing, what defines it," said Trace Schmeltz, an attorney specializing in white-collar crime at law firm Barnes & Thornburg who was not involved in the case.

 

"The defendant's trading activities disrupted the markets in his favor and against legitimate traders and investors," said Zachary Fardon, U.S. Attorney for the Northern District of Illinois.

Such as... high-frequency traders.

And the biggest irony: Steven Peikin, one of Coscia’s lawyers, argued that high-frequency traders routinely canceled orders. He told the jury that Coscia’s trading strategy was unique but not illegal.

Wrong: it is illegal, but he is absolutely right that everyone does it, especially the HFTs. But doesn't matter - next year Coscia will be back in court to hear just how many years he will spend in prison.

As for the HFTs... well, we already showed just what their "punishment" is when as reported earlier, Virtu reported record revenue in US equity trading in the third quarter...

 

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Wed, 11/04/2015 - 12:20 | 6748887 Gatos Locos
Gatos Locos's picture

Put him in a cell with Bubba.

Wed, 11/04/2015 - 12:25 | 6748907 Boris Alatovkrap
Boris Alatovkrap's picture

Boris is frequent "spoof" after is eat large meal of carbohydrate goodness. Good thing is not illegal in former Soviet Union.

Wed, 11/04/2015 - 13:16 | 6749145 lincolnsteffens
lincolnsteffens's picture

Boris, you must take more English lessons. The word you are confusing with "spoof" is "poot" as in "I ate too many under cooked beans and pooted for the next two days."

If this fellow get prison time he will be doing much pooting from the food.

Wed, 11/04/2015 - 14:13 | 6749417 Boris Alatovkrap
Boris Alatovkrap's picture

Now is Boris even more confusing! Are you not say "Spoof" is gaseous state, "Poot" is solid state phase?

Wed, 11/04/2015 - 13:55 | 6749336 RaceToTheBottom
RaceToTheBottom's picture

A Spoof and a lite Zippo do not go good together.

Wed, 11/04/2015 - 12:22 | 6748892 Duc888
Duc888's picture

 

 

 

 

Call it what it is, AI.

Wed, 11/04/2015 - 13:00 | 6749076 THE COIN
THE COIN's picture

I agree. The Allen Iverson crossover spoof cant be guarded.

Wed, 11/04/2015 - 12:22 | 6748893 Glass Seagull
Glass Seagull's picture

 

 

"Retail traders have been nothing but helped by HFTs"

-Every HFT Shop, Ever

Wed, 11/04/2015 - 12:23 | 6748898 NoDebt
NoDebt's picture

"Your papers please, Mr. Coscia."

"Um, certainly, here you go."

"Mr, Coscia, your papers are not in order.  Please come with us."

 

Wed, 11/04/2015 - 12:24 | 6748905 NoDebt
NoDebt's picture

"Investors are better off when spoofers who prey on high-frequency traders are brought to justice"

BOOM!  My head just exploded.

Wed, 11/04/2015 - 13:28 | 6749194 Whootie_who
Whootie_who's picture

The new Merican  JUST-US

Wed, 11/04/2015 - 13:41 | 6749268 Radical Marijuana
Radical Marijuana's picture

That JUST-US system is the result of prolonged political funding enforcing frauds, until the point where there emerges a new "royalty" which is effectively above the "rule of law," due to the overwhelming degree to which the most wealthy corporations control the government. Hence, the "rule of law" ONLY applies to the little guys.

After measuring 142 countries across eight categories, the 2015 Prosperity Index does NOT put the USA in the top ten. Rather, the US earned the dubious distinction of being the only Western country to register high levels of “state-sponsored political violence,” which pushed  the country down to 33rd spot in the safety and security sub-category, making it comparable to Venezuela, the Dominican Republic and El Salvador.

Wed, 11/04/2015 - 13:57 | 6749343 RaceToTheBottom
RaceToTheBottom's picture

Citadel just added another chapter to the modern version of Animal Farm:

Some Spoofers are more Equal than others...

Wed, 11/04/2015 - 12:25 | 6748908 Never One Roach
Never One Roach's picture

A member of the financial industry going to jail?!

 

Un-Possible!!!!!

Wed, 11/04/2015 - 12:27 | 6748912 Salsa Verde
Salsa Verde's picture

Only idiots and crooks play the equities markets anymore.  No sympathy or empathy for either side.

Wed, 11/04/2015 - 13:05 | 6749097 cougar_w
cougar_w's picture

You might be right about that, and if so, then consider that 100% of Fed policy moves for 10 years are intended to keep those guys in the money.

Idiots? What do you really think. Crooks? Then they are in great company.

Claiming these are idiots and crooks is probably safer than being angry.

Wed, 11/04/2015 - 13:50 | 6749310 Salsa Verde
Salsa Verde's picture

The idiots have convinced themselves that they are somehow smarter than the system designed to defraud them and the crooks don't fear any punishment for their actions:  Anger is a wasted emotion in this context.  It is indeed much safer and less stressful to write them all off and stop any attempts at interaction.

Wed, 11/04/2015 - 12:28 | 6748919 Son of Captain Nemo
Son of Captain Nemo's picture

Conviction(s)!...

What are the penalties and for how long?... Who are the Prosecutors that will finger the HFT "cogs in the wheel" to convict the fucks at the top like Blankfein and Dimon?!!!

Given the extent of the damage and the deaths caused by wars of choice since 2001 alone, I would think it would be the death penalty for every one of these cocksuckers on the "org chart" that gives them a choice of execution.

1) Lethal injection

2) Electric chair

3) Rope

4) Firing squad

5) Nail gun

6) Skydive without parachute from the top of the "Freedom Tower" with the first one off the side being the owner of that building!

Wed, 11/04/2015 - 12:29 | 6748925 Seasmoke
Seasmoke's picture

Coscia definately NOT in the club. Perhaps still time to become Cosciaburg to avoid prison time. Or have his daughter marry a Tribe member. 

Wed, 11/04/2015 - 13:29 | 6749205 negative rates
negative rates's picture

It's WAY to late for that, Providence demands consequences for being late to the party. And you are way to late.

Wed, 11/04/2015 - 12:31 | 6748930 RopeADope
RopeADope's picture

That was not a warning, it was a declaration of war.

In case you missed the previous 1000 declarations of war in the past 5 years...

Wed, 11/04/2015 - 12:35 | 6748952 bankonzhongguo
bankonzhongguo's picture

If sucks to have the Feds kick in your door and your wife go bug-shit.

Hopefully enough assets were squirreled away from seizure.

Get 10 years.

Do four.

Lose 50 pounds.

Make lots of interesting friends.

Write a book.

Free healthcare.

Go on the talk circuit.

Things could be worse.

You could actually believe in working hard and playing by the rules and expecting safety, security and dignity - only to find out there is none.

 

Wed, 11/04/2015 - 12:46 | 6748986 Grandad Grumps
Grandad Grumps's picture

I cannot say that I am especially fond of using guns and the legal system to legalize and protect crony fraud and theft ... for the benefit of the established power system.

But then again, that is exactly what the US corporation has morphed into, has it not? The worst rule the best at the point of a gun and with the assistance of captured and corrupt propagandist media and legal system.

Sad that we have fallen so far.

Wed, 11/04/2015 - 12:45 | 6748993 TheBeatles
TheBeatles's picture

1oz Silver American Eagles €12 @ EurGold

 

 https://www.eurgold.eu/silver/silver-coins/american-eagle-1oz-silver-coi...

Wed, 11/04/2015 - 12:56 | 6749056 cougar_w
cougar_w's picture

Lesson: You can't rip-off the Mafia.

Wed, 11/04/2015 - 12:59 | 6749073 GoldenDonuts
GoldenDonuts's picture

The march to total facism marches on.

Wed, 11/04/2015 - 13:01 | 6749081 buzzsaw99
buzzsaw99's picture

I guess he didn't hear about Sergey.

...If ya got so much money, I'm just gonna have to take some more. Because clearly some of you haven't gotten the message! This is my town! I run everything! If you live to see the dawn, it's because I allow it! I decide who lives and who dies!

[/John Herod, The Quick and the Dead]

Wed, 11/04/2015 - 13:03 | 6749095 Brokenarrow
Brokenarrow's picture

this guy is not from the upper east side. he is not connected to obama's possee. he didnt give rahm 100k. his is like one of the guys that work for el chapo that dont have political protection. he should have paid. he will be on appeal for a few years trying to pay off some appelate court, which has been donr by steve cohen et al. he should have hired eric holder. eric would have paid off all the right people. case closed.

Wed, 11/04/2015 - 13:49 | 6749308 RaceToTheBottom
RaceToTheBottom's picture

So Since Citadel is not trying to profit from the same thing, when should the US tax payer expect a check for all the profit they made?

 

If Citadel is saying they are just a Market Maker, they should make profits akin to a Utility not Masters of the Universe.

Wed, 11/04/2015 - 14:07 | 6749387 thecondor
thecondor's picture

Wait, this guy goes to jail for spoofing (mainly) Citadel, but all the HFT jack asses are still free? Don't the HFTs spoof the entire market?

Wed, 11/04/2015 - 15:27 | 6749739 SillyWabbits
SillyWabbits's picture

Never spoof a spoofer.

 

Wed, 11/04/2015 - 21:08 | 6751555 GRDguy
GRDguy's picture

In other words, if you lie and steal from the bigger bullies who lie and steal every day from unsuspecting investors, you go to jail. 

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