On August 7, the U.S. Court of Appeals for the Seventh Circuit unanimously upheld the first-ever criminal conviction under the anti-spoofing provision of the Commodity Exchange Act.1 In doing so, the court rejected arguments by the defendant, high-frequency commodities trader Michael Coscia, that the anti-spoofing provision is unconstitutionally vague and that the evidence was insufficient to support his conviction. As the first appellate court to address these arguments, the decision clears the path for the government to continue its efforts to pursue spoofing claims, particularly in the context of algorithmic and high-frequency trading.
This decision is an important one for private fund managers and other advisers, particularly managers that utilize algorithms or other systematic trading strategies. It makes clear that the push to pursue criminal sanctions for manipulative marketplace conduct is not limited to insider trading or to the securities markets. The Coscia decision also shows that courts are increasingly willing to look at the architecture of the code that generates trading instructions to divine a trader’s intent. Compliance and other supervisory personnel should consider whether and how these aspects of the Coscia
decision should be reflected in their regulatory compliance efforts.
“Spoofing” generally entails efforts to affect the price of a stock or commodity through buy or sell orders that the trader has no intention of being executed. Though spoofing takes many forms,2 it typically involves a trader: