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July 23, 2013

Financial regulators tame cheating ‘cheetah,’ fine, ban high-speed trader

Financial regulators on Monday took their first-ever action against a cheating “cheetah,” accusing a high-speed trader in oil and other commodities of deceiving the market and disrupting normal trading activity.

The action by the Commodity Futures Trading Commission said Panther Energy Trading LLC and its principal, Michael J. Coscia, used a computer algorithm to illegally place and cancel orders at head-spinning speeds. The practice is known as spoofing and is designed to trick other market participants.

The move marked the first time regulators used new powers to combat disruptive trading practices that were granted by the 2010 revamp of financial regulation called the Dodd-Frank Act. The action which includes a penalty and a yearlong trading ban, puts the regulatory focus on a growing and controversial segment of financial markets: the high-speed traders who are armed with technology more sophisticated than that used by the government cops who police markets.

Panther placed small orders to sell contracts for future delivery of a commodity, called futures contracts, and then instantly followed with large buy orders at successively higher prices. By placing and canceling these orders in milliseconds, said the CFTC, Panther sought to trick other computer algorithms into thinking there was a change in buying patterns and raising the sale price of the contracts it was selling. A millisecond is one-one-thousandth of a second.

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“The high-speed traders are dubbed ‘cheetahs’ after the large predatory cat that accelerates from zero to 60 mph in seconds. Regulators said Panther’s spoof algorithm involved trading in 18 futures contracts across four exchanges that ran the spectrum of commonly traded commodities. They included energy, agriculture and foreign currencies.

“’If you were talking about Las Vegas gambling, who cares? But this involves oil, gas, wheat, corn – the basic commodities that every single family in America counts on and pays for,’ Dennis Kelleher, head of the advocacy group Better Markets, said in an interview. ‘It is grossly irresponsible for the regulators to have not stopped this egregious conduct long before now, so let’s hope this is the beginning of more to come.’”

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Read full McClatchy article here

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