Market abuse under watch

In order to restore confidence in the financial markets and keep up with new trading technology, market authorities have been serioursly monitoring market participant behaviours. For instance, in the US, the Commodity Futures Trading Commission (CFTC or Commission) came up with final rules to prevent disruptive trading practices in the framework of the Dodd-Frank Act. In Europe, the European Securities and Market Authority (ESMA) has been promoting the convergent implementation of a market abuse regime and the European Union has recently agreed on the sanctions against market manipulators. Under the EU news rules, companies convicted of market abuse could be fined either 15 percent of their annual turnover, or 15 million euros. Individual perpetrators could face fines of up to 5 million euros and a ban on holding certain jobs within investment firms. The case of Panther Energy Trading LLC and its owner Michael J. Coscia is an exemplary one in the global fight against market manuipulation.

On July 22th 2013, the U.S. Commodity Futures Trading Commission (CFTC) issued an order filing and simultaneously settling charges against the firm and it ownerfor engaging in the disruptive practice of “spoofing” by utilizing a computer algorithm that was designed to illegally place and quickly cancel bids and offers in futures contracts. This unlawful activity took place across a broad spectrum of commodities from August 8, 2011 through October 18, 2011 on CME Group’s Globex trading platform. The CFTC Order requires Panther and Coscia to pay a $1.4 million civil monetary penalty, disgorge $1.4 million in trading profits, and bans Panther and Coscia from trading on any CFTC-registered entity for one year.

According to the CFTC, Coscia and Panther made money by employing a computer algorithm that was designed to unlawfully place and quickly cancel orders in exchange-traded futures contracts. For example, Coscia and Panther would place a relatively small order to sell futures that they did want to execute, which they quickly followed with several large buy orders at successively higher prices that they intended to cancel. 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. Although Coscia and Panther wanted to give the impression of buy-side interest, they entered the large buy orders with the intent that they be canceled before these orders were actually executed. Once the small sell order was filled according to the plan, the buy orders would be cancelled, and the sequence would quickly repeat but in reverse – a small buy order followed by several large sell orders. With this back and forth, Coscia and Panther profited on the executions of the small orders many times over the period in question.

In a related matter, the United Kingdom’s Financial Conduct Authority also issued a final notice regarding its enforcement action against Coscia relating to his market abuse activities on the ICE Futures Europe exchange, and has imposed a penalty of approximately $900,000 against him. Furthermore, the CME Group, by virtue of disciplinary actions taken by four of its exchanges, has imposed a fine of $800,000 and ordered disgorgement of approximately $1.3 million against Coscia and Panther and has issued a six-month trading ban on its exchanges against Coscia.

Rogue traders or runaway algorithms can generate costly operational errors and potentially huge fines from the market authorities. In this context of ever-changing regulations and varied compliance requirements, investment companies need to proactively detect themselves abusive and erroneous trade patterns. For ESMA compliance, all  market participants using automated strategies have to monitor and identify potentially abusive trading practices (momentum ignition, ping orders, quote stuffing, advanced Layering, spoofing, etc.). In that respect, complex event processing is the key technology that enables real-time analytics and internal case management for compliance officers who have no more excuse in front of the market authorities...  Learn more → Analytics and Decisions

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