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The Highs and Lows of Spoofing the Market
Traders Magazine Online News, August 31, 2017
In the 1920s a group of investors, known as the Radio Pool, traded among themselves in the stock of Radio Corporation of America, the tech company of the day. They succeeded in driving up the price, took their gains and left other investors to cope with falling prices when the pool withdrew its artificial support. In a 1934 report, the United States Senate committee investigating securities trading practices found the operations of the Radio Pool and others like it troubling:
[The testimony before the Senate Subcommittee again and again demonstrated that the activity fomented by a pool creates a false and deceptive appearance of genuine demand for the security on the part of the purchasing public and attracts persons relying upon the misleading appearance to make purchases. By this means, the pool is enabled to unload its holdings upon an unsuspecting public.] 1
On August 7, 2017, a federal appeals court in Chicago affirmed the conviction of a trader for spoofing and commodities fraud based upon a scheme, carried out through a computer algorithm, designed to manipulate market prices and mislead other market participants by creating the illusion of market movement. Sound familiar? The case is United States v. Coscia2.
Michael Coscia employed a trading program through which he placed large and small orders on the opposite sides of the market, in each case the small order at the desired price, and large order designed to shift the market towards the price at which the small order was listed. Here’s how the system worked in connection with Coscia’s trading of copper futures.
Coscia placed a sell order for five contracts at the price of $327.55,3 which was higher than the market price at the time. He then placed orders many times larger on the opposite side of the market at steadily increasing prices, which started at $327.40 and grew incrementally to $327.50. These buy orders created the illusion of market movement, increasing the perceived (but illusory) value of any given futures contract and allowing Coscia to sell his current contracts at $327.55, a price that he created. The buy orders were immediately cancelled.
Having sold five contracts for $327.55, Coscia now needed to buy the contracts at a lower price in order to make a profit. He therefore placed an order to buy five copper futures contracts for $327.50, which was below the price that he had just created. Coscia then placed large-volume orders on the opposite side of the market, priced at $327.70 and then $327.65, which created downward momentum, fostering the appearance of orders at incrementally decreasing prices and allowing Coscia to fill his small orders at the deflated price of $327.50. The large orders were then immediately cancelled. Coscia repeated the process tens of thousands of times, resulting in profits of $1.4 million over a period of weeks.
The investors in the Radio Pool spent months or even years distorting the price of RCA by creating the appearance of demand and market movement. Coscia accomplished the same thing in two-thirds of a second.
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