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When Is a Bid or Offer a 'Spoof'?
In 2010, Congress expressly criminalized a type of trading activity on the commodity futures exchanges referred to as “spoofing.” This new anti-spoofing statute greatly increased a prosecutor's power to crack down on traders who place and cancel orders at extremely high speeds through the use of powerful computer programs, supposedly in order to manipulate commodity futures prices and harm innocent investors. However, following the government's first criminal conviction for spoofing in United States v. Coscia, questions remain about what makes a commodity futures trader's conduct illegal instead of a legitimate trading strategy. Nonetheless, the Department of Justice (DOJ) and Commodity Futures Trading Commission (CFTC) recently have brought a substantial number of new cases against traders for violations of the anti-spoofing statute.
This article analyzes the confusion faced by commodity futures traders in assessing whether their trading strategies constitute illegal spoofing, which could land them in jail for up to 10 years, and examines whether the CFTC and Seventh Circuit have provided sufficient guidance on the distinction between spoofing and legitimate trading activity. It also explains why the Supreme Court's recent decision to not grant Coscia's petition for writ of certiorari, in which he argued that the anti-spoofing statute is unconstitutionally vague, will have significant consequences for the many spoofing actions currently pending before the courts, as well as for commodity futures trading in general.
The Anti-Spoofing Statute in Dodd-Frank
On July 21, 2010, President Obama signed into law the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank), Pub. L. No. 111-203, 124 Stat. 1376 (Jul. 21, 2010), which amended the Commodity Exchange Act and, for the first time, introduced a specific prohibition on a trading practice referred to as “spoofing.” See, D. Deniz Aktas, “Spoofing,” 33 Rev. Banking & Fin. L. 89, 89 (Fall 2013). This anti-spoofing statute states: “It shall be unlawful for any person to engage in any trading practice, or conduct … [that] is, is of the character of, or is commonly known to the trade as, 'spoofing' (bidding or offering with the intent to cancel the bid or offer before execution).” 7 U.S.C. §6c(a)(5)(C).
Under Dodd-Frank, any “knowing” violation of the anti-spoofing statute is a felony punishable by up to 10 years in prison and a fine of not more than $1 million. 7 U.S.C. §13(a)(2).
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