Decision by U.S. Court of Appeals Sets Precedent for Emboldened Stance Toward Spoofing

On August 7, 2017, the U.S. Court of Appeals for the Seventh Circuit (Court) issued a ruling in a long-running case of a high-frequency trader charged with violating the anti-spoofing provision of the Commodity Exchange Act (CE Act) along with commodities fraud. The Court dismissed the defendant’s argument that the anti-spoofing provision of the CE Act was unconstitutionally vague and that a conviction based on the provision was therefore invalid. The case is of monumental significance for the financial sector because it is likely to embolden the government to pursue and prosecute traders it deems to have fallen afoul of the anti-spoofing provision. The implications of the case may be troubling for some traders who feel that, despite the Court’s finding, the legal definition of spoofing may need further clarification. Just as importantly, there are instances where traders, acting with no scienter or illegal intent, will legitimately cancel orders. Given the centrality of the cancellation of orders to regulators’ view of spoofing, traders need to take the utmost care to ensure that they can prove their normal market activities did not amount to illegal market manipulation and fraud. To help readers understand the issues that came to light in the Court’s ruling, and to inform them about steps they can take to insulate legitimate trading activities from suspicions of spoofing and disastrous legal consequences, this article summarizes the ruling and presents insights from attorneys with expertise in anti-spoofing enforcement. For more on spoofing, see “WilmerHale Attorneys Detail 2016 CFTC Enforcement Actions and Potential Priorities Under Trump Administration” (Feb. 16, 2017).

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