Lately, the parasitic, price manipulative “Office Space“-inspired HFT practice known as “spoofing” has been consistently in the news: a week ago, it was the third largest futures broker, Newedge, who made headlines following a “record” FINRA handslap, a/k/a fine, lobbed at the brokerage for allowing spoofing to take place for four years between 2008 and 2011. Then yesterday, a Red Bank, NJ-based HFT shop called Panther Energy Trading, and its sole owner Michael Coscia were fined $4.5 million and got a 1 year ban from the industry for engaging in precisely the same activity. “Panther, based in Red Bank, New Jersey, and Coscia used a computer algorithm that placed and quickly canceled bids and offers in futures contracts for commodities including oil, metals, interest rates and foreign currencies. Panther and Coscia engaged in spoofing from August 8, 2011, to October 18, 2011, related to 18 futures contracts. The firm accumulated $1.4 million in profits by using the algorithm. Panther’s automated trading system entered 400,000 orders on CME’s electronic platform that were canceled 98 percent of the time and never intended to be completed.”
While none of this is fundamentally new to any of our readers, we are happy to report that in conjunction with Nanex, we can now present documentary evidence of the Panther algo in action.
But first, some more on this particular transgression from Bloomberg:
“By placing the large buy orders, Coscia and Panther sought to give the market the impression that there was significant buying interest, which suggested that prices would soon rise, raising the likelihood that other market participants would buy from the small order Coscia and Panther were then offering to sell,” the agency said its statement.
Panther and Coscia must pay $2.8 million in fines and disgorgement of profits to the CFTC, $903,000 to the U.K. Financial Conduct Authority and $800,000 in fines to CME Group (CME) Inc., owner of the world’s largest derivatives market. The CFTC also banned Panther and Coscia from trading for a year.
Bart Chilton, always happy to make a media appearance and take some time away from his busy poetry-book writing schedule, chimed in:
Bart Chilton, one of three Democrats among the CFTC’s four commissioners, said in a statement that the trading ban should have been longer than one year. The firm’s conduct was an “egregious violation” of commodities law, he said, “and warrants the imposition of a much more significant trading ban to protect markets and consumers, and to act as a sufficient deterrent to other would-be wrongdoers.”
In other news, the HFT industry is shaking in its boots knowing the full wrath of the regulators’ wristslapping power and fury is about to be unleashed, if only on the no name, one-man shop operations. The same regulators who used another Red Bank, NJ-based HFT firm, Tradeworx, to “conclude” that high frequency trading was not at fault in the flash crash.
The Panther Energy Trading case was the first to use Dodd-Frank regulations barring disruptive trading practices, including spoofing of orders by bidding with an intent to cancel before a trade is conducted, the CFTC said. The 2010 law overhauled market oversight after largely unregulated trades helped fuel the 2008 credit crisis.
“I would expect more CFTC investigations and actions related to ‘disruptive trading practices,’ which will further add to the regulatory scrutiny that so-called ‘high-frequency traders’ currently face,” Stephen Humenik, a lawyer at Covington & Burling LLP, said in an e-mail.
We wouldn’t, although even if the CFTC did take its role as a regulator (headed by former Goldmanite Gary Gensler) seriously, the opportunity cost of spoofing, namely the occasional fine, would still be perfectly acceptable in an industry where a one-man shop with a few computers can make $1.4 million in 2 months. Which also means that many more Panther Energies will emerge in the coming weeks and months.
Until then, here is Nanex, explaining to all those who suddenly turned green with envy that one firm can make almost $10 million profit per year from high frequency trading, how it’s done.
On July 22, 2013, the CFTC issued a press release:
We wrote an algorithm to hunt through our data and look for real-world examples of this specific spoofing incident, based on information in the CFTC and other press releases. It was pretty easy to find. Below is just the tip of the iceberg. All images are depth of book charts for August 16, 2011 trading in the September 2011 Crude Oil Futures contract (NYMEX – CL). We are showing just 1 contract to keep it simple – we found the algo operating in many contracts. It likes to place and cancel orders with sizes 66, 77, 88, 99, 122, 133, 144, 155, and 166. We are sure there will be other sizes and permutations as they become more sophisticated over time: learning how to hide their spoofing activity.
The FCA put out a nice PDF animation which illustrates one of these spoofing events. Based on our data, we believe the event shown in their example was from October 2011 ICE Brent Crude (LCO.V11) futures contract on September 8, 2011 at 7:58:34 ET.
1. Set 1. The red vertical lines are when the spoofing algo is running. That isn’t normal.
2. Zoom of Chart 1.
3. Zooming in on an area from Chart 2.
Study the pattern labelled 1 – 4 in the chart below. It will repeat in the other charts and will be easy to spot once you know what it looks like.
The algo places large orders on the opposite side of the book (which show up as red, orange and yellow depending on how large they are). Note when the color appears on one side, trades (white dots), execute on the other side. That is, large sell orders are immediately followed by trades at the bid, then the large orders disappear. Often the large orders immediately appear on the other side of the book.
4. Zooming in on another area from Chart 2.
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Finally, courtesy of the FSA, here is an even more simplified schematic of the spoofing that Panther Energy was engaged in. Remember it well: every time a trade is executed, it is almost a certainty that someone in the execution chain is being “spoofed” by an algo, making its boss who is engaging in illegal activity, that much richer.