Financial regulators on Monday took their first-ever action against a cheating “cheetah,” accusing a high-speed trader in oil and other commodities of deceiving the market and disrupting normal trading activity.
The action by the Commodity Futures Trading Commission said Panther Energy Trading LLC and its principal, Michael J. Coscia, used a computer algorithm to illegally place and cancel orders at head-spinning speeds. The practice is known as spoofing and is designed to trick other market participants.
The move marked the first time regulators used new powers to combat disruptive trading practices that were granted by the 2010 revamp of financial regulation called the Dodd-Frank Act. The action , which includes a penalty and a yearlong trading ban, puts the regulatory focus on a growing and controversial segment of financial markets: the high-speed traders who are armed with technology more sophisticated than that used by the government cops who police markets.
Panther placed small orders to sell contracts for future delivery of a commodity, called futures contracts, and then instantly followed with large buy orders at successively higher prices. By placing and canceling these orders in milliseconds, said the CFTC, Panther sought to trick other computer algorithms into thinking there was a change in buying patterns and raising the sale price of the contracts it was selling. A millisecond is one-one-thousandth of a second.
“This is faster than the blink of an eye. No human can do this. These are pre-meditated programs. It’s not just happenstance that these things occur,” said Bart Chilton, a CFTC commissioner who has questioned whether so-called “cheetahs” do more harm than good in financial markets. “I hope this sends a real message of deterrence to would-be bad actors in these markets, particularly the cheetahs.”
Regulators banned Panther and Coscia from trading for a year and demanded $2.8 million to settle the charges. Half of that payment was a civil penalty, the other half a return of ill-gotten gains. Panther and Coscia did not admit wrongdoing in settling the order.
“While forms of algorithmic trading are of course lawful, using a computer program that is written to spoof the market is illegal and will not be tolerated,” David Meister, director of enforcement for the CFTC, said in a statement announcing the order.
The high-speed traders are dubbed “cheetahs” after the large predatory cat that accelerates from zero to 60 mph in seconds. Regulators said Panther’s spoof algorithm involved trading in 18 futures contracts across four exchanges that ran the spectrum of commonly traded commodities. They included energy, agriculture and foreign currencies.
“If you were talking about Las Vegas gambling, who cares? But this involves oil, gas, wheat, corn – the basic commodities that every single family in America counts on and pays for,” Dennis Kelleher, head of the advocacy group Better Markets, said in an interview. “It is grossly irresponsible for the regulators to have not stopped this egregious conduct long before now, so let’s hope this is the beginning of more to come.”
Panther’s activity highlights a nagging question about who benefits from today’s financial markets.
“It begs the question of who are these markets for, anyway? You need the speculators, you have to have them, but . . . they impact just about everything people consume,” Chilton said in an interview.
The stock market was designed to promote capital formation, a company attracting investment by sharing its success with stockholders, who in turn bet that the shares they own will rise in value. But high-frequency traders make stealth bets throughout the trading day, faster than the blink of an eye, leaving in their dust the retail investor trying to buy or sell stock by way of a phone or Internet order.
Commodities markets were designed for both the buyer and seller of, say, wheat or crude oil to discover the price at which each is willing to lock in future deliveries, allowing each to hedge against sudden fluctuations in the future.
“Cheetahs” on average account for 30 percent to 50 percent of the trading volume on any given day, even more during periods of price volatility.
“It’s very difficult for the regulators to keep up with the cheetahs and to keep up with the markets. We don’t have supercomputers like many of the cheetahs do, so we have to have other attributes in order to keep pace with them,” said Chilton, noting electronic data trails have proved helpful in understanding what happened in the marketplace.
Congress is weighing proposed legislation that would require registration of the so-called cheetahs, many of whom are based abroad. The legislation would require testing, so-called kill switches for trades that spur large swings in prices, and tougher penalties for misbehavior.