Wave of action against high-frequency traders hits home

The wave of US enforcement action curbing market manipulation in high-frequency trading has finally hit UK shores with the first FCA fine imposed for market abuse in relation to such trading earlier this week.

A fine of $903,176 (approximately £598,000) was imposed on Michael Coscia, a US-based high-frequency trader, for deliberate abuse of the commodities markets by means of an algorithmic programme that he had designed to instigate a trading strategy known as ‘layering’. Layering involves the placement by traders of multiple, often large, orders that are not intended to be executed and that are then rapidly cancelled. This creates artificial levels of supply and demand, driving the price of stock up or down, at which point ‘genuine’ orders are completed to benefit from the artificially inflated or reduced price.

In this case, Coscia placed thousands of such large orders for Brent Crude, Gas Oil and Western Texas Intermediate futures from the US on the ICE Futures Europe exchange in the UK between 6 September and 18 October 2011. Taking advantage of the price movements generated by his strategy, he executed a number of smaller trades, making a profit of $279,920 at the expense of other, primarily high-frequency, traders in the market. Using a monitoring tool to identify the layering trading pattern, ICE investigated the trading and the FCA concluded that Coscia’s behaviour amounted to deliberate market abuse, contrary to s.118(5) of FSMA 2000. Coscia’s trading pattern created false liquidity in the market, and at least one other significant market participant stopped trading as a result of the adverse impact of his strategy…

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