From Pits to Algos, an Old-School Trader Makes Leap to Spoofingby , , and
Michael Coscia's career spans open outcry to high frequency
Traded on paper or by fiber-optic cable, fraud is fraud
Michael Coscia is no one’s idea of a 21st-Century Wall Street wizard.
In many ways he’s a throwback -- a small-timer from Brooklyn who bootstrapped his way out and found the good life running a tiny firm near the Jersey Shore called Panther Energy Trading.
Until last Tuesday, when the good life collapsed beneath him.
Coscia has become the unlikely poster child for the market crime of the moment: spoofing, a kind of electronic pump-and-dump scheme that traders use to profit at others’ expense.
At 53, stocky and balding, Coscia confounds the stereotype of a flash boy gone wild. Yet his rise almost perfectly follows the evolution of American trading. He sweated down in the New York trading pits, back in the 1980s when people, not algorithms, ruled the Street. Then, to survive, he learned to move assets with the click of a mouse, and later, to keep up with quickly evolving competitors, he began running the fraction-of-a-second, software-powered trading strategies that eventually landed him in hot water.
His Nov. 3 conviction in Chicago showed that you don’t need to be a dropout coding savant or a Mountain Dew-swigging misfit to be found guilty of a five-year-old electronic-age trading crime. Fraud, whether it’s perpetrated on paper in an open outcry pit or with a flash of light in a fiber-optic cable, is old school.
“The world of electronic trading is best understood by thinking in terms of the pit,” said Robert Webb, a finance professor at the University of Virginia. “We can mislead ourselves into thinking it’s something beyond human comprehension.”
At his Red Bank, New Jersey-based Panther Energy Trading, Coscia turned to programmer Jeremiah Park in 2011 for help in drawing up his high-frequency trading strategies. Park said in court that Coscia was the best boss he ever had. “He was extremely generous and accommodating,” Park told jurors. “I almost felt like I was overpaid.”
Coscia came up with the logic and the strategy while Park wrote the trading algorithms to match, according to court testimony. In one of Park’s handwritten notes from the time, Park said the programs included the creation of quote orders “used to pump market.”
Spoofing, criminalized as part of the 2010 Dodd-Frank Act, occurs when traders trick other investors’ algorithms by entering their own buy or sell orders with no intention of filling them. That creates fake demand that pushes prices up or down. It’s robotic sleight of hand, in a way, that ends up making suckers of the machines, and people, on the other side of the phantom orders.
When prosecutors questioned Coscia on “used to pump market,” Coscia sounded like the low-tech Everyman who worked as a mail carrier to put himself through Brooklyn College. He said he wasn’t sure what Park meant. He testified that they were the programmer’s words and “not my language.”
Jurors understood the subtext. It seemed as if Coscia were trying to blame Park, said Emmanuel Sandoval, a Chicago call-center employee on the jury.
Hank Bessembinder, a finance professor at Arizona State University who was a rebuttal witness for the government, went through data for the jury that showed that even after orders were filled there were attempts to cancel them by Coscia’s algorithms.
Coscia, who took the stand in his own defense, testified he didn’t do anything wrong. He said repeatedly he intended to trade on every order he placed. He was asked whether he fraudulently induced other market participants to react to the deceptive market information -- the phantom orders -- he created.
“I didn’t induce anyone,” Coscia said. “There’s no deceptive market information either.”
Attempts to reach Coscia for comment by phone and at his New Jersey homes were unsuccessful.
After seven days of testimony, jurors deliberated for an hour. They convicted Coscia on six counts of commodities fraud and six counts of spoofing. Each fraud count carries a maximum sentence of 25 years in prison and a $250,000 fine, according to the Chicago U.S. Attorney’s Office. Each count of spoofing carries a maximum sentence of 10 years in prison and a $1 million fine. He faces sentencing on March 17.
“For all the complexity of high-frequency trading algorithms, it came down to a fairly simple question,” said Peter Henning, a professor at Wayne State University Law School in Detroit. “Did he intend to have the orders filled? It’s apparent the jury didn’t believe him.”
Another juror, a pipefitter who asked that his name be withheld, said that Coscia had fantastic lawyers on his side and thought, during some of the defense presentation, that Coscia broke no laws because it was common for traders to use computer programs.
But when they went back to the jury room and read the rules about fraud and the definition of spoofing, it was impossible to conclude that Coscia didn’t do this, he said.
Sandoval, asked why it took only an hour for the jury to decide, said that after all the testimony, they were ready.
“We had heard a ton of evidence,” he said. “We had taken our notes.”