Spoofing Defendant Coscia Says He Intended to Trade Ordersby and
Citadel, Teza traders testify they spotted oversize orders
Trial is first under Dodd-Frank's ban on trader spoofing
Michael Coscia, testifying in his own defense in the first-ever “spoofing” prosecution, said he didn’t tell a programmer that trading software would be used to “pump” the market.
Asked about the programmer’s description in notes presented as evidence to the jury, Coscia responded that he wasn’t really sure what the phrase meant.
Coscia, the head of Panther Energy Trading LLC, is charged with placing small orders followed by large ones on the other side of a trade -- and then canceling the big ones. Coscia is accused of making $1.4 million over three months in 2011 in a scheme that prosecutors say involved thousands of trades designed to manipulate commodity prices.
“I never put in any orders I didn’t want to trade,” Coscia testified Thursday.
The trial in Chicago federal court will be the first time jurors are asked to apply a provision of the 2010 Dodd-Frank Act making spoofing illegal. It follows a year of U.S. law enforcement efforts to rein in traders who systematically place orders they don’t intend to execute, allegedly to trick the market into thinking there’s demand that doesn’t actually exist. Coscia’s fate may shape other cases, two of which are pending in Chicago, a center for commodities firms that use high-frequency trading.
Among those cases is the prosecution of Navinder Singh Sarao. He is fighting extradition from the U.K. to face charges over the May 2010 flash crash that temporarily wiped out almost $1 trillion from the value of U.S. equities.
This month, the U.S. Commodity Futures Trading Commission sued Chicago-based trader Igor Oystacher and his firm 3Red Trading LLC for spoofing over 51 trading days. Oystacher previously racked up $660,000 in fines from three of the world’s largest futures exchanges.
Coscia, 53, was indicted last year on six counts of commodities fraud and six of spoofing for trades made over three months in 2011. Coscia, under questioning from his lawyer, said he didn’t try to trick other traders into reacting to false price and volume information created by his orders.
“I didn’t intend to trick anybody,” Coscia said. “I didn’t hide or conceal anything here.”
If convicted, Coscia could face as long as 25 years in prison and fines in the millions of dollars. He is scheduled to face questioning by prosecutors Friday.
The government finished calling its witnesses on Thursday after jurors heard from current and former employees of competing trading firms, including Chicago rivals Citadel LLC and Teza Technologies LLC. Those witnesses told jurors Wednesday that they were victims of Coscia’s trading strategy.
While spoofing causes frustration among market participants, and in some cases financial losses, to prove their case prosecutors must show Coscia never intended to have his orders filled.
Coscia’s lead lawyer, Steven Peikin, told jurors in his opening statement that there are no rules on the exchanges prohibiting the placement of orders for different quantities of futures contracts on both sides of the market.
Prosecutors spent parts of two days going over Panther Energy trading data that showed extremely large sell and buy orders with smaller opposite orders. When those smaller orders were filled, the large orders were canceled.
While witnesses testified that the size of those orders were unusually large, the size of at least one of their losses was decidedly small.
Anand Twells, who monitors Citadel’s automated trading strategies, told jurors his firm lost $480 in a couple of gold futures trades in 2011 when the firm filled a couple of Panther trades.
Hovannes Dermenchyan, global head of trading and markets at Teza, testified about large orders for 100 to 300 contracts coming into the Brent crude market over a six-hour period on ICE Europe Futures on Oct. 14, 2011. He said they were 10 to 20 times larger than what he was used to seeing.
“It caught me by surprise initially,” Dermenchyan testified. “I didn’t believe my eyes.”
Dermenchyan, noticing a pattern of the largest orders being quickly canceled after a small trade on the other side, shut down most of Teza’s programs and analyzed the trading activity. He discovered that it was repeated 4,000 times during the six-hour period.
The case is U.S. v. Coscia, 14-cr-00551, U.S. District Court, Northern District of Illinois (Chicago).