A New Jersey high-frequency trader was accused of manipulating commodity prices by sending false signals to the market and then executing trades within milliseconds to make huge profits, prosecutors said Thursday, in what they described as a first-of-its-kind prosecution.
Michael Coscia, 52, was indicted for illegally earning around $1.5 million through the Chicago-based CME Group — the world's largest operator of futures exchanges — and European futures markets in 2011. The U.S. attorney's office in Chicago said it's the first case under major changes to federal commodities law in 2010, when Congress enacted the Dodd-Frank Wall Street reforms after the financial crisis.
High-frequency trading was the subject of Michael Lewis' best-selling book "Flash Boys," which chronicled how Wall Street traders sought profits and a jump on competitors through ever-faster computer systems down to fractions of a second. Powerful computers analyze market information and then execute buy and sell orders within milliseconds, or thousandths of a second. The practice has come under increasing scrutiny, with the FBI confirming earlier this year that it had been investigating such firms.
Critics argue that it can lead to wild swings in the market and unfair advantages for companies with faster computers.
"Traders and investors deserve a level playing field," U.S. Attorney for Northern Illinois Zachary Fardon said in a statement announcing the indictment by a grand jury in Chicago.
The 19-page document includes timelines broken into the precise milliseconds Coscia allegedly executed each stage of the fraudulent trades. At 9:39 a.m. on Sept. 2, 2011, for instance, he made $560 on gold futures in under a second after artificially bumping up the market price with an order that he cancelled within milliseconds, the indictment says. Coscia allegedly engaged in similar trades hundreds of times, including for soybean oil and copper.
The goal was "to trick other traders into reacting to the false price and volume information he created with his fraudulent and misleading quote orders" that "appeared to represent a substantial change in the market," the indictment alleges.
Coscia, a registered commodities trader since 1988, faces six counts each of commodities fraud and "spoofing," which refers to signaling that an order is being placed without intending to follow through. If convicted, he could face decades in prison.
His attorney, Richard T. Reibman, told The Associated Press that he is "discussing the matter" with prosecutors. He declined further comment.
Coscia has come under scrutiny before. The Commodity Futures Trading Commission last year accused him and his New Jersey trading firm, Panther Energy Trading, of manipulating markets through allegedly placing orders that it never planned on executing. The federal regulator fined the company $2.8 million for "spoofing" trades and banned the firm from trading for one year. Panther Energy Trading settled with the CFTC without admitting or denying the allegations.
High-frequency trading now accounts for a large percentage of U.S. stock trading. But the practice began to come under intense public scrutiny following the "flash crash" of May 6, 2010, when a glitch erased 600 points from the Dow Jones industrial average in five minutes.
The CME Group owns the Chicago Mercantile Exchange, the Chicago Board of Trade, the New York Mercantile Exchange and exchanges that trade futures on gold and other metals, as well as agricultural products including cocoa, soybeans and corn.
A spokesman for the CME Group in Chicago, Chris Grams, declined any comment on Coscia's indictment.