CHICAGO, Nov 5 (Reuters) - CME Group Inc will consult lawyers on why a jury this week convicted a high-frequency trader in the first U.S. prosecution of the manipulative strategy called spoofing, Executive Chairman Terry Duffy said on Thursday.
Spoofing occurs when traders place orders in markets without intending to execute them, as part of a scheme to create the illusion of demand.
CME has always prohibited such behavior, Duffy said, and in 2013 fined commodities trader Michael Coscia and his firm for entering large orders that they did not intend to trade.
Lawyers say Coscia’s criminal conviction on Tuesday clarifies precisely what constitutes spoofing.
“What we need to do is get the facts from this case - this is the first trial-by-jury case - and get briefed by the legal folks and see why they came up with the decisions they did,” Duffy told reporters at a futures conference.
He plans to talk with lawyers both inside and outside of CME.
High-frequency traders, who often enter and cancel orders quickly, make up a substantial share of CME’s volume. A clearer understanding of what constitutes spoofing could potentially prevent market disruptions.
“I’m not saying it’s right or wrong,” Duffy said about the verdict. “I just want to know how he was to be found innocent, how he was to be found guilty, and get that from the legal folks.”
Coscia reaped more than $1 million within three months in 2011 through orders he placed in 17 markets operated by CME and three operated by ICE Futures Europe, prosecutors said.
His conviction was the first under an anti-spoofing provision added to the Commodity Exchange Act by the 2010 Dodd-Frank financial reform.
Rules against entering orders without intending to execute them have “been sort of the guideline,” said Richard Gorelick, chief executive of high-speed trading firm RGM Advisors.
“What exactly that means at a certain level - when some of these behaviors have actually gone on on some of these exchanges for many years, allegedly - it’s really interesting and it’s confusing to market participants,” Gorelick said at the conference.
“It would have been far better if the rules of the road were clear from the get-go, if regulators of exchanges were very clear as to what the rules meant, and issued guidance on how they could be interpreted, rather than watching people go to jail or not go to jail in order to figure out what the rules are,” he said.
Editing by Matthew Lewis