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Green light illuminates data cable terminals inside a communications room at an office in London, U.K., on Monday, May 15, 2017. Governments and companies around the world began to gain the upper hand against the first wave of an unrivaled globalcyberattack, even as the assault was poised to continue claiming victims this week.(bloomberg)
(Bloomberg) -- In science fiction, the machines are usually out to get the people. In the case of former UBS Group AG trader Andre Flotron, it’s the other way around.
His technique was to fool high-speed computer algorithms operating in gold and silver futures into raising or lowering their price using a practice known as "spoofing," or placing fake orders and quickly canceling them, U.S. prosecutor Avi Perry said in opening arguments at Flotron’s trial. The conspiracy was alleged to have taken place from July 2008 to November 2013.
"They called it a spoof, but call it what you want, it’s a fraud," Perry told jurors. "The victims, who used algorithms, got ripped off by the defendant."
Prosecutors allege the shady dealings were rampant on the UBS precious-metals desk, and that Flotron, a Swiss national, taught a more junior trader in the bank’s Stamford, Connecticut, office how to spoof. The former trader, wearing a light-gray suit and purple tie, smiled slightly at the jury when the lawyer said his name. He sat quietly with his hands in his lap.
The case presents a twist on the usual theme of high-speed algorithms taking over markets and running circles around slower human counterparts, popularized by Michael Lewis’s "Flash Boys." The book describes how a group of traders discovered that algorithms were front-running, or placing trades ahead of their orders, and found ways to fight back.
Spoofing-Case Stumbles by Prosecutors May Not Save Ex-UBS Trader
Algorithms, which can execute multiple trades in the time it takes to blink, also faced scrutiny when New York Attorney General Eric Schneiderman sued Barclays Plc in 2014 for allegedly allowing high-speed firms to take advantage of other investors in so-called "dark pools," or non-public markets, which lack the transparency of exchanges.
The bank settled the probe in 2016. Schneiderman reached a similar accord with Credit Suisse Group AG at the same time.
Flotron is on trial in New Haven, Connecticut, federal court charged with conspiring to commit commodities fraud. Testimony is expected to last for the next two weeks.
Flotron’s defense lawyer, Marc Mukasey, said during his opening statement that the former UBS trader was a market veteran trying to make his way amid vast technological changes.
"Human traders like Andy were being replaced" by algorithms, Mukasey said. "Andy was an old-school guy. He traded using a human touch."
Spoofing Is a Silly Name for Serious Market Rigging: QuickTake
Spoofing was outlawed by the 2010 Dodd-Frank Act, and only a handful of people have faced criminal charges related to that practice. Flotron is the second to go to trial on spoofing-related charges. The first was Michael Coscia, owner of high-speed trading firm Panther Energy Trading LLC, who was convicted in 2015 and sentenced to three years in prison.
Critics say the statute is vague and captures a vast amount of permissible trading activity in which orders are canceled. An appeals court in Chicago last year disagreed, rejecting a challenge from Coscia.
Flotron had legitimate reasons for placing and canceling orders that had nothing to do with spoofing, Mukasey said. As an experienced trader, he often had to make quick decisions based on prevailing interest rates or information in news reports, Mukasey said.
Prosecutors are "bending and shaping and twisting the truth," Mukasey said. "They will fail, because the evidence is tarnished and worthless."
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