Fraud is misrepresentation made with knowledge of its' falsity and an intent to deceive. It's elements are:
1. An untrue assertion of fact
2. Such assertion, expressly made to deceive other parties
3. Actual reliance upon such assertion by another party
4. Justifiable reliance on such assertions
5. Economic loss.
If one intentionally flashes a large bid with no intention of honoring it, they make an untrue assertion (1). If their purpose for doing so is to juice the market north in order to actually sell into buyers, (2) is met. When other parties make their decisions based upon the fraudulent representation of the spoofing party, we have element (3). And, when parties jump in (long) upon seeing the flashed quote and are met by a wave of selling, by all means, element (5) can be met. That is certain.
The questions are:
1. Is it "justifiable" (i.e., is element 4 met) to rely on the assertions (element 3) made in this situation?
The answer depends upon the decision of the judge to apply a traditional or more modern approach to the concept of "justifiable reliance." Formally, courts would have said that parties are fully responsible for their actions in determining the accuracy of the information upon which they rely and therefore, a customer trader should know that bids and offers can be flashed/withdrawn. End of argument: no fraud.
A more modern trend would hold that a parties reliance upon a flashed bid or offer (resulting in a trading decision that brings about economic injury) would be justifiable unless such information ignored constitutes a gross failure to act. In other words, that an individual's not knowing that quotes could be flashed would somehow constitute a ridiculously irresponsible lapse in good faith and dealing. This is unlikely. Customer traders are not required to know the habits, processes, or technological ins-and-outs of professional market participants.
Therefore, I believe that element (4) would be met.
2. How would courts discern the element of "scienter," or knowledge of falsity; in other words, where do we determine, factually, where posting and immediately pulling a bid is a trading decision as opposed to posting and pulling a bid based upon a desire to influence the actions of other market participants?
This is the sticky one, and the one which would - if anything at all - make the legal arguments crumble. I believe that it would be the both repetitive and consistent activities of particular traders and firms spoofing in one direction and trading in another that would lead to element 1 of fraud and its' subsequent implications. But in and of itself, flashing a quote and not doing anything OR flashing a quote and trading in the opposite direction "once in awhile" would not speak of an intent to deceive.
Then again, the argument would likely never get this far, as some would argue (I, among them) that if flashing quotes is not to be permitted, why is the ability given to traders? If the regulators desire for bids and offers to be firm for several seconds, the systemic and regulatory framework should reflect that by mandating that bids or offers be 'sticky' in both (a) rule and (b) technology for 10 seconds, 20 seconds, whatever.
Some would also argue that in flashing a quote - for whatever purpose they do so - there is the that they will get hit or taken by a faster market participant, which would obligate them to fill the order. I've never heard of a trade being broken because one side "didn't really mean it."
Just a few thoughts. I'm not an attorney, BTW.
LPS5 |
