The U.S. Attorney’s Office has emerged victorious in a groundbreaking jury trial prosecuting a commodities trader for illegal spoofing. The jury found the high-frequency trader guilty of 12 counts of fraud and market manipulation of the futures market. It was the first criminal trial prosecuting spoofing.
According to the jury, the trader improperly influenced the price of futures contracts on the Chicago Mercantile Exchange. As a result, he may be sentenced to up to 25 years in prison. However, more legal challenges are expected in this case as his attorney has promised to pursue all legal options going forward.
Bloomberg called it the “Biggest Test Yet” of the Dodd-Frank Act’s prohibition on the practice of placing orders with the intent to cancel them. The measure has been controversial because the activity is marked by canceling orders on the exchange, which is perfectly legal unless accompanied by the specific intent not to have those orders executed.
Some experts had expressed concerns that the jury would have difficulty understanding the concept and would vote to acquit. High speed traders frequently cancel a significant percentage of their trades when they are not engaged in market manipulation. Government prosecutions of spoofing so far seem to go after oversized trades with a cancellation rate approaching 100 percent.
This may be the first of many prosecutions, as several other cases are working their way through the system. Perhaps the highest profile is the CFTC charges brought against a London trader for misconduct on the day of the May 2010 flash crash. A CFTC whistleblower reportedly helped the commodities regulator isolate the importance of these trades.