The Legal and Economic Implications from Recent UK Spoofing Cases.
Yan Cao, Marlene Haas, Greg Leonard, 23 March 2021
The UK Financial Conduct Authority (“FCA”)[1] has in recent years intensified its efforts in securities and commodities markets to detect and pursue the type of disruptive trading behaviour called “spoofing.” This emphasis coincides with a similarly increasing focus by the US Commodity Futures Trading Commission (“CFTC”) and the US Department of Justice (“DOJ”) on spoofing cases in the US. Spoofing may take different forms, but usually involves the placing of non-bona fide orders, often of large quantity, on one side of the market while trying to execute a bona fide order on the other side of the market. Once the bona fide order has been executed, the trader cancels the non-bona fide orders quickly. To date, more than 40 enforcement actions targeting spoofing have been filed against individuals and companies by US regulators and more than 5 have been filed by UK regulators. In February 2019, Julia Hoggett, the FCA’s Director of Market Oversight, delivered a speech about the FCA’s commitment to tackling market abuse, calling compliance with such rules “critical to the integrity and health of our financial markets.”
Although there is some variation in the characteristics of alleged wrongful conduct, depending on the regulator or the specific financial market, regulators have broadly focused on the following behaviour to determine if a trading pattern constitutes spoofing: (1) size of supposed non-bona fide orders; (2) order imbalance or size discrepancy between bona fide and supposed non-bona fide orders; (3) placing of multiple orders on the non-bona fide side at different price levels; (4) the length of time during which the supposed non-bona fide orders stay pending on the market, especially after the bona fide orders are executed; and (5) the ratio of cancelled orders relative to the total orders placed. Two early cases of enforcement of spoofing laws by UK authorities stand out and provide guidance in evaluating subsequent conduct: the FCA’s investigation of Michael Coscia,[3] and FCA v. Da Vinci Invest Limited.[4]
