A Legislative Improvement to Anti-Spoofing Enforcement Efforts in the Securities Markets
By George Leonardo
As high-frequency trading becomes more ingrained as a mainstay in financial markets, the need for efficient, fair, and consistent regulation is becoming increasingly important. Although the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”) took a strong step forward in reducing market manipulation by explicitly prohibiting a price manipulation practice known as spoofing in the commodities and futures markets, no such clear prohibition currently exists in securities markets. The Securities Exchange Commission (“SEC”) has historically brought spoofing enforcement actions under general antimanipulation and anti-fraud provisions of the Securities Exchange Act of 1934 (“Exchange Act”). Specifically, the SEC has relied on §9(a)(2) and §10(b) of the Securities Exchange Act of 1934, as well as Rule 10b-5. However, almost all spoofing cases brought by the SEC have been settled out of court. Moreover, an analysis of the limited case law applying these general provisions suggests spoofing may not necessarily violate these provisions, particularly in the Second Circuit. Because it is, at best, unclear whether courts will find that spoofing violates §10(b) or Rule 10b-5, or §9(a)(2), this paper argues that Congress should pass legislation that extends application of Dodd-Frank’s anti-spoofing provision from commodities and futures markets to the securities markets. Specifically, Congress should provide the SEC the same authority Dodd-Frank provides the Commodities and Futures Trading Commission (“CFTC”) by explicitly prohibiting spoofing in securities and defining spoofing as “bidding or offering with the intent to cancel the bid or offer before execution.” This language would bolster SEC enforcement efforts by lessening the intent requirement from the current general anti-fraud and anti-manipulation provisions. It would also ensure consistency between antispoofing enforcement regimes in futures and securities markets and further deter spoofing generally.