Dodd-Frank Anti-Spoofing Statute Not Void for Vagueness For High Frequency Trader
In United States v. Coscia, the District Court for the Northern District of Illinois Eastern Division declined to dismiss an indictment for “spoofing” against a high frequency trader under 7 U.S.C. §§ 6c(a)(5)(C) and 13(a)(2) based on the defendants allegations that the statute was void for vagueness. It is important to note that since this was a motion to dismiss the Court was required to assume the allegations in the complaint are true.
The “anti-spoofing” provision of the Commodity Exchange Act prohibits “any trading, practice, or conduct [that] . . . 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).” 7 U.S.C. § 6c(a)(5)(C). Knowing violation of the anti-spoofing provision is a felony. Id. § 13(a)(2). Coscia argued that the anti-spoofing provision is unconstitutionally vague because it fails to offer any ascertainable standard that separates spoofing from legitimate trade practices such as partial-fill orders (larger-than-necessary orders entered to ensure a sufficient quantity is obtained) and stop-loss orders.
The Government argued that there was never any serious debate as to whether the conduct alleged in the indictment — intentionally entering bids and offers with the intent to cancel them — falls within the meaning of the statute. For instance, in January 2011, before the CFTC had issued any interpretive guidance, CME’s CEO Craig Donohue opined that: “The distinguishing characteristic between ‘spoofing’ . . . and the legitimate cancellation of other unfilled or partially filled orders is that ‘spoofing’ involves the intent to offer non bona fide orders for the purpose of misleading market participants and exploiting that deception for the spoofing entity’s benefit.
The court found the statute’s “intent to cancel” requirement was significant. It cited precedent which stated “When the government must prove intent and knowledge, these requirements do much to destroy any force in the argument that application of the statute would be so unfair that it must be held invalid.”
The court found Coscia’s alleged “intent to cancel” sets his conduct apart from the legitimate trading practices described in his memorandum. The alleged conduct in the indictment involves the entry of large-volume orders with the intent to “immediately cancel.” Because the alleged conduct clearly involves “bidding or offering with the intent to cancel” the Court did not find § 6c(a)(5)(C) impermissibly vague as applied to Coscia.