United States v. Coscia, 080717 FED7, 16-3017
|Court:||United States Courts of Appeals, Court of Appeals for the Seventh Circuit|
|Judge Panel:||Before Ripple, Manion, and Rovner, Circuit Judges.|
|Opinion Judge:||RIPPLE, CIRCUIT JUDGE.|
|Party Name:||United States of America, Plaintiff-Appellee, v. Michael Coscia, Defendant-Appellant.|
|Case Date:||August 07, 2017|
Argued November 10, 2016
Appeal from the United States District Court for the Northern District of Illinois, Eastern Division. No. l:14-cr-00551-l - Harry D. Leinenweber, Judge.
Before Ripple, Manion, and Rovner, Circuit Judges.
RIPPLE, CIRCUIT JUDGE.
Today most commodities trading takes place on digital markets where the participants utilize computers to execute hyper-fast trading strategies at speeds, and in volumes, that far surpass those common in the past. This case involves allegations of spoofing1 and commodities fraud in this new trading environment. The Government alleged that Michael Coscia commissioned and utilized a computer program designed to place small and large orders simultaneously on opposite sides of the commodities market in order to create illusory supply and demand and, consequently, to induce artificial market movement. Mr. Coscia was charged with violating the anti-spoofing provision of the Commodity Exchange Act, 7 U.S.C. §§ 6c(a)(5)(C) and 13(a)(2), and with commodities fraud, 18 U.S.C. § 1348(1). He was convicted by a jury and later sentenced to thirty-six months' imprisonment.2
Mr. Coscia now appeals.3 He submits that the anti-spoofing statute is void for vagueness and, in any event, that the evidence on that count did not support conviction. With respect to the commodities fraud violations, he submits that the Government produced insufficient evidence and that the trial court applied an incorrect materiality standard. Finally, he contends that the district court erred in adjudicating his sentence by adding a fourteen-point loss enhancement.
We cannot accept these submissions. The anti-spoofing provision provides clear notice and does not allow for arbitrary enforcement. Consequently, it is not unconstitutionally vague. Moreover, Mr. Coscia's spoofing conviction is sup- ported by sufficient evidence. With respect to the commodities fraud violation, there was more than sufficient evidence to support the jury's verdict, and the district court was on solid ground with respect to its instruction to the jury on materiality. Finally, the district court did not err in applying the fourteen-point loss enhancement.
The charges against Mr. Coscia are based on his use of preprogrammed algorithms to execute commodities trades in high-frequency trading.4 This sort of trading "is a mechanism for making large volumes of trades in securities and commodities based on trading decisions effected in fractions of a second."5 Before proceeding with the particular facts of this case, we pause to describe the trading environment in which these actions took place.
The basic process at the core of high-frequency trading is fairly straightforward: trading firms use computer software to execute, at very high speed, large volumes of trades. A number of legitimate trading strategies can make this practice very profitable. The simplest approaches take advantage of the minor discrepancies in the price of a security or commodity that often emerge across national exchanges. These price discrepancies allow traders to arbitrage between exchanges by buying low on one and selling high on another. Because any such price fluctuations are often very small, significant profit can be made only on a high volume of transactions. Moreover, the discrepancies often last a very short period of time (i.e., fractions of a second); speed in execution is therefore an essential attribute for firms engaged in this business.
Although high-frequency trading has legal applications, it also has increased market susceptibility to certain forms of criminal conduct. Most notably, it has opened the door to spoofing, which Congress criminalized in 2010 as part of the Dodd-Frank Wall Street Reform and Consumer Protection Act, Pub. L. No. 111-203, 124 Stat. 1376 (2010). The relevant provision proscribes "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).7 For present purposes, a bid is an order to buy and an offer is an order to sell.
In practice, spoofing, like legitimate high-frequency trading, utilizes extremely fast trading strategies. It differs from legitimate trading, however, in that it can be employed to artificially move the market price of a stock or commodity up and down, instead of taking advantage of natural market events (as in the price arbitrage strategy discussed above). This artificial movement is accomplished in a number of ways, although it is most simply realized by placing large and small orders on opposite sides of the market. The small order is placed at a desired price, which is either above or below the current market price, depending on whether the trader wants to buy or sell. If the trader wants to buy, the price on the small batch will be lower than the market price; if the trader wants to sell, the price on the small batch will be higher. Large orders are then placed on the opposite side of the market at prices designed to shift the market toward the price at which the small order was listed.
For example, consider an unscrupulous trader who wants to buy corn futures at $3.00 per bushel in a market where the current price is $3.05 per bushel. Under the basic laws of supply and demand, this trader can drive the price downward by placing sell orders for large numbers of corn futures on the market at incrementally decreasing prices (e.g., $3.04, then $3.03, etc.), until the market appears to be saturated with individuals wishing to sell, the price decreases, and, ultimately, the desired purchase price is reached. In short, the trader shifts the market downward through the illusion of downward market movement resulting from a surplus of supply. Importantly, the large, market-shifting orders that he places to create this illusion are ones that he never intends to execute; if they were executed, our unscrupulous trader would risk extremely large amounts of money by selling at suboptimal prices. Instead, within milliseconds of achieving the desired downward market effect, he cancels the large orders.
Once our unscrupulous trader has acquired the commodity or stock at the desired price, he can then sell it at a higher price than that at which he purchased it by operating the same scheme in reverse. Specifically, he will place a small sell order at the desired price and then place large buy orders at increasingly high prices until the market appears flooded with demand, the price rises, and the desired value is hit. Returning to the previous example, if our unscrupulous trader wants to sell his corn futures (recently purchased at $3.00 per bushel) for $3.10 per bushel, he will place large buy orders beginning at the market rate ($3.00), quickly increasing that dollar value (e.g., $3.01, then $3.02, then $3.03, etc.), creating an appearance of exceedingly high demand for corn futures, which raises the price, until the desired price is hit. Again, the large orders will be on the market for incredibly short periods of time (fractions of a second), although they will often occupy a large portion of the market in order to efficiently shift the price.
On October 1, 2014, a grand jury indicted Mr. Coscia for spoofing and commodities fraud based on his 2011 trading activity. Prior to trial, he moved to dismiss the indictment, arguing that the anti-spoofing provision was unconstitutionally vague. He further argued that he did not commit commodities fraud as a matter of law. The district court rejected both arguments.
Trial began on October 26, 2015, and lasted seven days. The testimony presented at trial explained that the relevant conduct began in August of 2011, lasted about ten weeks, and followed a very particular pattern. When he wanted to purchase, Mr. Coscia would begin by placing a small order requesting to trade at a price below the current market price. He then would place large-volume orders, known as "quote orders, "8 on the other side of the market. A small order could be as small as five futures contracts, whereas a large order would represent as many as fifty or more futures contracts. At times, his large orders risked up to $50 million.9 The large orders were generally placed in increments that quickly approached the price of the small orders.
Mr. Coscia's specific activity in trading copper futures helps to clarify this dynamic. During one round of trading, Mr. Coscia placed a small sell order at a price of 32755, 10which was, at that time, higher than the current market price.11 Large orders were then placed on the opposite side of the market (the buy side)...
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