Back in December 2010, we wrote about a section in the Dodd-Frank Act called Section 747 . Section 747 added some language to the Commodity Exchange Act which deals with disruptive practices:
SEC. 747. ANTIDISRUPTIVE PRACTICES AUTHORITY.
ANTIDISRUPTIVE PRACTICES.—It shall be unlawful for any person to engage in any trading, practice, or conduct on or subject to the rules of a registered entity that—
(A) violates bids or offers;
(B) demonstrates intentional or reckless disregard for the orderly execution of transactions during the closing period; or
(C) is, is of the character of, or is commonly known to the trade as, spoofing’ (bidding or offering with the intent to cancel the bid or offer before execution).
At the time, the HFT industry had just begun their fight to neuter this new rule. They knew that this rule could be the one that finally gave regulators the authority to shut down some of their manipulative practices, most notably spoofing. They then embarked on their typical tactic of trying to slow down any new regulations.
In May of this year, after years of roundtables and comments, the CFTC finally issued an interpretative guidance and policy statement on Section 747. In their statement, the CFTC clarified spoofing:
“With respect to CEA section 4c(a)(5)(C), the Proposed Order stated that a market participant must act with some degree of intent to violate the “spoofing” provision. Reckless trading, practices, or conduct would not violate CEA section 4c(a)(5)(C); instead, a person must intend to cancel a bid or offer before execution”
Yesterday, the CFTC decided to flex their new muscles that were created by Section 747 and charged a high frequency trading firm , Panther Energy Trading, with spoofing:
“The Commodity Futures Trading Commission (“Commission”) has reason to believe that from August 8, 2011 through October 18, 2011, Panther Energy Trading LLC and Michael J. Coscia violated Section 4c(a)(5)(C) of the Commodity Exchange Act.
Beginning on August 8, 2011 through and including October 18, 2011 Panther Energy Trading LLC and Michael J. Coscia engaged in the disruptive practice of “spoofing” (bidding or offering with the intent to cancel the bid or offer before execution) through algorithmic trading utilizing a program that was designed to place bids and offers and to quickly cancel those bids and offers before execution”
This case should not come as a surprise to those that trade the markets every day. HFT algorithms have made a mockery out of posting bids and offers. HFT market makers claim that the constant flickering and cancellations are necessary to adjust their risk. But as we have all speculated, there must be more than market making behind all those cancellations.
While the Panther case appears relatively small, it is the first of its kind under the new CFTC powers. Could Panther Energy be the first of many new cases that the CFTC files? Based on the Panther complaint, it certainly seems like the CFTC has had the data all along. Now they finally have the authority to nail these guys. Caveat spoofers!!! The CFTC is coming after you.