The Financial Conduct Authority (FCA) has metered out its first ever high-frequency trading (HFT) fine for market manipulation, but the trader’s direct market access (DMA) provider may face no punitive action.
Michael Coscia was fined US$903,176 for the deliberate manipulation of commodities markets after he designed and deployed an algorithmic trading programme that distorted liquidity in Brent Crude, Gas Oil and Western Texas Intermediate futures.
This allowed Coscia to net US$279,920 over a six-week period on the IntercontinentalExchange’s ICE Futures Europe venue, which he accessed from the US via a DMA provider.
Although the FCA could not confirm whether it was still pursuing the DMA provider in question, a spokesperson for the Authority said under FCA regulation, the broker offering DMA may not be responsible for the client’s actions, depending on the specific risk issue.
Coscia was an experienced commodities trader, so the know-your-customer and due diligence requirements placed on DMA providers may well have been met by the broker.
Coscia’s ‘layering’ algorithm placed small orders which he intended to trade on one side of the order book followed by a series of large orders on the opposite side of the order book which were not genuine – typically 20 times the average size placed by other market participants.
The execution of the small order would trigger the immediate cancellation of the large order, a pattern, which would repeat on the opposite side of the order book, which allowed Coscia to benefit from the price movements.