In an amicus brief filed with the U.S. Supreme Court in Michael Coscia v. United States, two law professors, Ronald Filler and Jerry Markham, argue that the government's criminal prosecution of Mr. Coscia for engaging in the trading practice known as "spoofing" is based on a legal standard that is unconstitutionally vague. In August 2017, a three-judge panel of the U.S. Court of Appeals for the Seventh Circuit unanimously upheld the criminal conviction of Mr. Coscia for engaging in spoofing in the futures markets.

Mr. Coscia was sentenced to a three-year prison term for violating a prohibition on the placement of any order to trade 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)." He was the first person criminally charged under the anti-spoofing provision of the Dodd-Frank Act. In upholding the conviction, the Seventh Circuit rejected arguments that the statute did not provide Coscia with adequate notice of what conduct was prohibited, and therefore was unconstitutionally vague. In his petition for certiorari, Mr. Coscia has once again raised the argument that the statute is unconstitutionally vague.

In their brief, Professors Filler and Markham argue that the legal standard being applied by the government (1) does not provide traders with a clear line between legal and illegal trading conduct, and (2) criminalizes conduct – the frequent cancellation of orders – that is integral to the operation of financial markets. The professors assert that, in the futures industry: (i) spoofing was not "commonly known" prior to the enactment of Dodd Frank; (ii) in today's high-frequency trading algorithm-dominated market, traders intend to cancel orders for a number of legitimate reasons; and (iii) that defining spoofing based on a high level of cancellations leaves traders "to guess when cancellations, which are essential to their business, are criminalized."

The professors also argue that "every speculator intends to cancel trades before their execution for a broad range of reasons, hence the high cancellation rates. Indeed, the overwhelming majority of all limit orders entered on electronic trading platforms are cancelled before they are executed." This raises the issue regarding how to know which cancellations are legal and which are not: "And more importantly, how do you prove the requisite intent element by singling out a few of the thousands of orders placed by a HFT?"

Commentary / BobZwirb

While there are a number of important policy issues associated with the practice of spoofing, including whether the activity is self-correcting and whether it is harmful to the markets in a meaningful way, the issue raised here goes to its legal essence, i.e., whether it is possible to distinguish between proper and improper order cancellations. As with many other prohibitions, the statute is written in a way that lends maximum discretion to regulators and prosecutors, and by design it is near impossible to know the legal boundaries in the absence of a body of case law that fleshes out the "facts and circumstances."

While that gives little comfort to those like Coscia who are first out of the gate (recall Lindsey Vonn's fate in the Olympics when she drew the first spot during the Super-G event), the Seventh Circuit (opinion by Judge Kenneth Ripple) did point to some factors that may make it difficult to overturn the conviction. In particular, the Court of Appeals distinguished between legal order cancellations, such as "stop-loss" and "fill-or-kill" orders that are "designed to be executed upon the arrival of certain subsequent events," and the kind of orders that Mr. Coscia placed, which it characterized as having been "never intended to be filled." Moreover, it wasn't just the high level of order cancellation that was Mr. Coscia's undoing, but the large disparity between the high cancellation rate of his large orders and the low cancellation rate of his small orders that caught the eye of the Court. This discrepancy, according to the Court, suggested Mr. Coscia's orders were placed "not with the intent to actually consummate the transaction, but rather to shift the market toward the artificial price at which the small orders were ultimately traded."

That is not to devalue the arguments that the amici make here. In particular, the amorphous nature of the prohibition makes it difficult to know what is illegal ex ante, a shortcoming that takes on greater importance in a criminal context than a civil one.

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