Chicago, the historic hub of futures markets, is becoming the center of civil and criminal litigation in high-speed trading.
The combination of brand-new laws banning disruptive trading practices and a U.S. Attorney's Office in Chicago excited to crack down on wrongdoers is swelling the variety of cases in court here. Many focus on "spoofing," a prohibited practice where traders profit from putting orders they plan to cancel, often just milliseconds later on.
In addition to winning the first criminal conviction of a spoofer this month, in U.S. District Court in Chicago, federal prosecutors here are moving to attempt a British trader implicated of contributing to the 2010 Flash Crash through market control. Meantime, the Product Futures Trading Commission is pressing civil spoofing charges versus a Chicago trading company, and competing companies are fighting one another over charges of rigging the market.
The decision versus Panther Energy Trading's Michael Coscia– the jury needed just an hour to discover him guilty on Nov. 3 of all 12 counts– gives high-speed traders their clearest signal yet on what they can and can not do under the Dodd-Frank Wall Street Reform and Customer Defense Act. Cross this line and, at worst, they could deals with decades in prison or, at very well, be compelled to drop profitable trading practices and methods.
"It really is a totally brand-new frontier for traders in the market," says Stacie Hartman, a Chicago litigator at Schiff Hardin who represents trading companies and other market individuals. "This is now a particular concentrate on the guts of exactly what traders do every microsecond.".
Till just recently, Chicago has actually played a narrow function in the enforcement of trading laws. Instead, these matters typically were managed in New york city courts, provided the distance to Wall Street's stock trading. But Chicago's function has been raised by the flood of electronic trading orders flowing from all over the world through futures exchange controller CME Group's computer servers.
Also, Chicago trading firms, including Citadel, Jump Trading, DRW Holdings and Allston Trading, have made the city a hub for high-speed trading. While a lot of them outgrew futures floor operations, they now dart in and out of monetary markets worldwide making use of secret methods.
In addition, U.S. Lawyer Zach Fardon has actually made policing the market a priority. He constructed a team of a dozen prosecutors last year to focus solely on securities and commodities criminal offenses, utilizing new devices under Dodd-Frank to thwart disruptive trading practices in the electronic sphere.
"Fairness and honesty in the monetary markets need to be protected in the age of high-frequency trading," states Renato Mariotti, the lead federal district attorney in the Coscia trial.
The Coscia case hinged on intent. The high-speed trader acknowledged that he canceled tens of thousands of orders over a nine-week duration in 2011, however suggested that he at first had actually planned to follow through on the trades. To the jury, though, Mariotti proved that the rapid-fire orders and cancellations were market manipulations intended to trick and defraud other traders.
District attorneys are "now emboldened and they have a blueprint," K&L Gates lawyer Cliff Histed told an audience at the Futures Industry Association Exposition in Chicago this month.
Histed dealt with the Coscia case in the U.S. Attorney's Workplace before leaving for private practice this year. "We've got a U.S. lawyer who's not afraid to enforce this law," he says later on in an interview. The new aggressiveness includes surprise FBI check outs to trading firms and the aid of new CFTC and Securities and Exchange Commission whistle blower protocols produced by Dodd-Frank, he says.
CFTC Workplace Director Christopher Ehrman says he anticipates the number of whistle blower cases to integrated the next six months. Currently, the program helped net British trader Navinder Singh Sarao, who was arraigned in Chicago in September on spoofing accusations. He's battling extradition to the U.S
. The CFTC lodged civil charges last month against Chicago-based 3Red Trading and its owner, Igor Oystacher. In fighting the suit, the offenders say the commission is categorizing "legitimate trading and risk management as a market violation.".
"The quantity of litigation shows much less agreement in between the managed and the regulators about the specifications of these rules– the scope and penalty of these regulations– since it's a big step to litigate these cases," says Christian Kemnitz, an attorney at Katten Muchin Rosenman who is working with trading firm customers.
Trading firms are incriminating each other. Chicago-based Castle also complained about Panther's trading, and another Castle staff member testified for the prosecution in Coscia's trial.
High-speed firms are suing each other in Chicago federal court, too. HTG Capital Partners took legal action against "John Doe" over spoofing and is attempting to force CME to expose the name of the wrongdoer. Kemnitz is representing "John Doe" in the case however won't talk about the matter.
"Companies wish to do the ideal thing," he states. "They believe they can earn money under whatever the rules are. They simply need to know what the rules are." Anticipate Chicago prosecutors and courts to help set them directly.
Till recently, Chicago has played a narrow function in the enforcement of trading laws. Chicago's function has been lifted by the flood of electronic trading orders flowing from all over the world through futures exchange controller CME Group's computer system servers.
The new aggressiveness consists of surprise FBI sees to trading companies and the aid of brand-new CFTC and Securities and Exchange Commission whistle blower protocols developed by Dodd-Frank, he states.
In battling the lawsuit, the offenders state the commission is classifying "legitimate trading and threat management as a market violation.".
Trading companies are incriminating each other.