"Cheetah" traders perplex CME

Aug 5, 2013

Those in the ag world have been burned a few times too many by the futures market in recent years. The downfall of MF Global, which took billions of customer money with it, and the upset of Peregrine Financial Group have shaken producers’ confidence in the trustworthiness of ag commodity futures. A recently-discovered example of manipulation of the commodity futures market has the potential to worsen an already damaged relationship.

As mentioned in last week’s issue of WLJ, the algorithmic commodity trading firm Panther Energy Trading LLC (Panther) was fined and banned from trading for a year following the discovery it had been “spoofing” the market. This was accomplished by using a computer algorithm designed to illegally place and quickly cancel bids and offers in futures contracts.

As an example of the activity, Panther would place a relatively small, genuine sell order, quickly followed by several large buy orders at successively higher prices they intended to cancel. This behavior would give the market the impression of significant buying interest, which suggested that prices would soon rise, raising the likelihood that other market participants would buy from the small order Panther was offering to sell. Once the small sell order was filled by a real buyer, the false buy orders would be cancelled.

According to the Commodities Futures Trading Commission (CFTC), this behavior netted the company quite a lot of profit while it occurred between Aug. 8 and Oct. 18 of 2011. CFTC also reported the spoofing took place “across a broad spectrum of commodities” which included Light Sweet Crude Oil, Natural Gas, Corn, Soybean, Soybean Oil, Soybean Meal, and Wheat contracts on CME Group’s Globex trading platform.

“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,” said David Meister, CFTC’s enforcement director, in the commission’s announcement on the issue.

“We will use the Dodd Frank anti-disruptive practices provision against schemes like this one to protect market participants and promote market integrity, particularly in the growing world of electronic trading platforms.”

Panther and its principal, Michael J. Coscia, were fined $1.4 million civil monetary penalty and required to disgorge $1.4 million in trading profits by CFTC. Both the company and Coscia have been banned from trading for a year. The fine and trade ban were accepted without admission of wrongdoing. This was the first such enforcement action of its kind made under the Dodd- Frank Act signed into law in 2010.

To add to the CFTC actions, the UK’s Financial Conduct Authority has imposed a penalty of approximately $900,000 against Coscia relating to other market abuse activities on the ICE Futures Europe exchange. CME Group has also fined Panther and Coscia $800,000 and ordered disgorgement of $1.3 million, as well as issuing a six-month trading ban on both the individual and the company.

In an official statement following the action, CFTC Commissioner Bart Chilton expressed dissatisfaction with the one-year trade ban imposed on Panther and Coscia.

He explained that in the world of modern electronic trading, a one-year ban amounts to little more than “a nice sabbatical” for algorithmic traders who can return to the markets with their identities “cloaked behind technology.”

“[T]hese types of violations of the law are becoming more common with the advent of high frequency traders—traders I’ve termed ‘cheetahs’ due to their incredible speed. The cheetahs are to be commended for their innovative strategies, at the same time, when they violate the law, regulators need to be firm and resolute in our desire to deter such activities.”

Chilton called for “a much more significant trading ban to protect markets and consumers” than the one-year trade ban. He did, however, voice approval for the fines and disgorgement of profits.

Impact on ag

How much of an impact this has on ag confidence in the commodity markets is hard to tell. One the one hand, it has the potential to dissolve what reduced trust MF Global and Peregrine left people with, while on the other hand, it’s hard to diminish what doesn’t exist.

“As of right now, [the enforcement action] doesn’t seem like it has had an effect as [market spoofing] goes on in the market every day,” Troy Vetterkind of Vetterkind Cattle Brokerage told WLJ.

“There’s trading firms out there doing it in livestock every day.”

Vetterkind is an outspoken opponent of the high-speed algorithmic trading, as well as the almost around-the-clock times under which many ag commodities currently trade. He frequently rages against the impact high-speed trading has had on the futures markets in his daily market newsletter. After discussing potential market-related reasons for the recent non-movement in the live cattle futures market last Wednesday, he then offered another possibility:

“Or maybe market participants are just so sick and tired of years of mismanagement of the agriculture commodity markets by CME officials and want no part of the 23 hour diluted livestock trade that is raped and pillaged daily by high speed algorithm trading firms that we just sit here in this same trading range for another month.”

In talking to WLJ, he had much the same to say, laying much of the fault at CME’s feet.

“The thing I’m curious about is why CME lets it go on. They are supposed to be a self-regulating agency, but it happens every day.”

When asked what the enforcement action against Panther might mean for the agricultural world, Vetterkind was unsure.

“I don’t know where it starts or where it ends. These guys [spoofers] have such sophisticated computer programs that truly the CFTC can’t keep up with them. So where do you start to reign in this stuff? I don’t know. Maybe this Panther thing is the start.”

Chilton, of course, has a different perspective on the commission’s abilities to keep the “cheetah” traders in line.

“At the end of the day, regulators will have to work overtime to be able to keep up with the cheetahs and their superfast trading. But like the cheetahs are a breed all their own, so are regulators. And, we are a persistent bunch.”

He went on to promise that CFTC will be “tenacious and tireless” in their pursuit of “market predators that break the rules.”

“And, we need those that violate, or may be thinking of violating the law to understand that regulators will always be harsh hard-hitters when the rules are broken,” he said.

Whether this enforcement action against Panther either curtails market spoofing in the future, or worsens agricultural market participants’ distrust in the futures markets has yet to be seen. What Vetterkind was sure of, however, was that past misadventures in futures trading have harmed market participation, and algorithmic trading combined with almost constant trade hours have made it worse.

“Volumes are way, way down. It really did start right after MF global. Peregrine made it worse. And now people just don’t even want to mess with it anymore. With the 23-hour shenanigans, with algorithms chasing algorithms, they just don’t want to be a part of it.”

"It’s truly hurting the market,” he added.

When asked about his thoughts for the future, he was again uncertain though he voiced some hope.

“How it all turns out, I don’t know. I hope it gets better and I hope the industry as a whole is able to re-instill some trust to the true customer base, but it sure hasn’t happened yet.” — Kerry Halladay, WLJ Editor