news details |
|
|
| SPOOFING A NEW HIGH PROFILE CRIME | | | Dr. Manzoor Ahmad Yetoo
We all know that a
sophisticated type of crime is money laundering called "smurfing," named for the cute blue cartoon characters, that involves runners for a drug organization making small cash deposits at various banks to avoid the currency transaction reporting rules.
Now there is "spoofing," a form of market manipulation. This sounds new to general public but it has been going on since some time. Charges against Michael Coscia in what it said was the first criminal indictment for spoofing. While not quite as evocative as smurfing, spoofing involves an effort to fool market participants into believing there are large orders for futures contracts to draw them into making trades. Mr. Coscia is accused of placing orders that he planned to cancel to induce others to buy or sell in response, thereby artificially driving prices up or down so that he could then trade.
Regulators have begun focusing on spoofing because of the rise of high-frequency trading firms, which now account for as much as 50 percent of stock trades. The firms use computer programs to buy and sell securities and futures contracts that react almost instantaneously to small movements in the market. In July, Reuters reported that the Securities and Exchage Commission was Looking at 10 brokers for possible spoofing, along with a related form of manipulation called "layering," which involves placing multiple orders at different prices to give the appearance of significant trading interest.
Such persons operate a high-frequency trading firm, that use computer programs called Flash Trader and Quote Trader to enter large orders that are quickly canceled; the intention remains to move the price to where they want. The Dodd-Frank Act in London specifically gives the commodity commission the authority to pursue spoofing of futures contracts, which is defined as "bidding or offering with the intent to cancel the bid or offer before execution."
The criminal charges raise spoofing to a new level. Criminals now will have to face a potential prison sentence of more than five years under the advisory federal sentencing guidelines, based on the claim in the indictment that the trading strategy earns millions in profit.Prosecution also poses a threat to other high-frequency trading firms that may employ a trading strategy using a high volume of orders that are quickly canceled.
Large orders on the other side of that trade at a higher or lower price to entice others to enter the market on the belief that the larger order would affect the price. Once the price moves so that his small order is filled, the program canceles the large orders. The program would then do the same transaction in reverse by entering another round of large orders that would move the price up or down to allow the firm to exit the position at a profit.
The price differences even can be small, sometimes fractions of a penny, so that the profits are quite modest on an individual set of trades.
As is usually the case in a white-collar crime prosecution, the authorities biggest hurdle will be proving intent. The government must show that the design of the computer program is circumstantial evidence of such firms intent to defraud other traders by misleading them with the large orders that is planned to cancel before they could be filled.
The victims like Mr. Coscia's trading strategy may not be appealing to a jury either: other high-frequency trading firms. The indictment describes in detail how a set of trades and canceled orders took place in less than a tenth of a second. Only firms using computer programs to buy and sell in the blink of an eye could respond to the type of spoofing the Justice Department is prosecuting. So it would not be a surprise if Mr. Coscia argued that these sophisticated firms engaged in similar conduct through their own trading strategies and were not defrauded by orders entered by his program.
The spoofing charges may send a chill through the high-frequency trading world because the evidence of fraudulent intent will come from a program that uses rapid-fire orders and does not depend on humans for its execution. So finding intent and its execution becomes another head ache for authorities around world.
(The author is an expert in environment, project & waste Management,
occupational safety& health & pollution control and empanelled expert for IRCA).
(You may reach him at [email protected]) |
|
|
|
|
|
|
|
|
|
|
|
|
| |
| |
|
|
|
|
 |
|
|
|
|
STOCK UPDATE |
|
|
 |
| BSE
Sensex |
 |
| NSE
Nifty |
|
|
| |
CRICKET UPDATE |
|
|
|
|
| |
| |
|
|
| |
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
