The Financial Conduct Authority (FCA) has taken action against a high frequency trader for the first time, fining US trader Michael Coscia almost one million dollars for manipulating commodities markets.
The UK financial industry regulator said that Coscia had used an algorithmic trading program in order to place large numbers of 'false' trades over a six week period. This allowed Coscia to make large profits at the expense of other high frequency trading firms by employing a trading strategy known as 'layering'.
Layering is a technique whereby a trader enters a number of orders in one direction to inflate the price of a stock that they actually want to sell. The buy orders are immediately removed, allowing the trader to make a larger profit on the sale of stocks.
According to the FCA, Coscia placed thousands of orders for companies on the ICE Futures Europe exchange in the UK, including Brent Crude, Gas Oil and Western Texas Intermediate, resulting in profits of $279,920 (£182,560) between September and October 2011.
In response the FCA fined Coscia $903,176 (£597,993), the first instance of the regulator taking direct action against a high frequency trader. High frequency trading has become more commonplace in securities exchanges in recent years, as well as in foreign exchange markets, with huge volumes of transactions made in fractions of a second.
Tracey McDermott the FCA's Director of Enforcement and Financial Crime commented that Coscia was "cheating the market" and other participants.
"High Frequency Trading and the use of algorithms are an important and commonplace part of the markets nowadays but in this case these techniques were deliberately designed to abuse the market, undermining its integrity. This is unacceptable, which is why we have taken tough action to punish Coscia and deprive him of any benefit he acquired."
The investigation was conducted alongside the Commodities and Futures Trading Commission (CFTC) and the Chicago Mercantile Exchange (CME) in the US, with Coscia received fines for similar actions on US markets.
Under Dodd-Frank regulation guidelines, CFTC has ordered that Coscia and Panther Energy Trading to pay a $1.4 million (£0.9m) penalty, as well as ordering the two to give up $1.4 million in trading profits.
David Meister, the CFTC's Enforcement Director, said: "While forms of algorithmic trading are of course lawful, using a computer program that is written to spoof the market is illegal and will not be tolerated.
"We will use the Dodd Frank anti-disruptive practices provision against schemes like this one to protect market participants and promote market integrity, particularly in the growing world of electronic trading platforms."
Earlier this year the CFTC said it was investigating illegal trading practices employed by some algorithimc traders to manipulate markets using methods such as 'wash trades'. The CFTC warned of difficulties for exchanges in detecting foul play due to the speed at which trades are conducted.