The ICE US Futures issued an advisory notice on December 9 to specify " in broad terms, the key elements of a satisfactory program of supervision". While only 2 pages, there a several very important points stressed in the document:
First, ICE wants to " remind market participants that the adoption of written supervisory policies, alone, is not sufficient to discharge a firm’s supervisory duty under Rule 4.01(a)". One of the specific points they address to that is to "periodically train its employees/agents regarding Exchange Rules and Rule changes". DCM has been advising clients that a single annual training may not be considered adequate supervision, especially if it a general overview rather than addressing key changes and provisions of exchange rules. Similarly, this would suggest that exchange specific or at least exchange comparative (i.e., differences in CME, ICE US, and ICE Europe rules) training is advisable.
Second, ICE stresses size of firm and level of exchange activity are a determinant in "appropriate", They indicate "while regular manual review and monitoring of an employee’s trading activity may be perfectly sufficient for a proprietary trading firm with 5 traders, a larger proprietary firm with 50 traders may require an automated solution to effectively review and monitor employee activity." This is one of the rare times when the potential requirement of an automated system may be applied to a firm. DCM would also caution that ICE refers to "the nature and size of Exchange activity" elsewhere in the advisory without mention of number of traders. A firm with very active traders may reach the supervisory threshold for greater resources without needing to have 50 traders.
DCM has been a tad strident on the issue of failure to supervise - ICE Futures may have made our point for us.
The full two page notice is here
Tag50 (log in) issues again - this time person using it maybe did bad things, trader loses log in for almost a month
The CME just fined a trader $25K and suspended trading privileges for 25 days after the the fine is paid. I frequently talk to clients about the importance the exchanges (and the CFTC) place on proper use of the trader log in (referred by the CME as Tag50 to reflect where in the order and transaction message the trader ID appears. One of the points i raise is that the trade oversight mechanisms start from the Tag50 and the deal with aggregated data from there.
In this case, the CME emphasized that point.
"Yang’s conduct impeded the Exchange’s ability to further investigate potentially violative messaging activity by one or more individuals who utilized Yang’s Tag 50"
The actions were not undertaken by the trader but the use of the Tag50 made an investigation harder. The trader paid a significant penalty and a suspension. This should be a caution to all firms and traders that you are responsible for any mistake someone else makes using your id - just don't lend it out. The order is here
I hope everyone has a great Thanksgiving (if in the US).
.Readers of this blog, our clients, and people who have been at a DCM seminar presentation in the past may recall DCM's distinction between trade compliance and market compliance. We use trade compliance to refer to oversight of transactional activities - bid, offer, execution and the related issues like disruptive trading - while we use market compliance to refer to oversight of other areas of the regulatory rules that frequently deal with market transparency - such as block trade reporting and Tag 50 log ins. Frequently, disciplinary actions under the market compliance rules are accompanied by smaller fines and possibly a short suspension (especially in the case of improper use of Tag 50s).
But every once in a while, the market is reminded that market transparency and accuracy is just as important to the exchanges under market compliance as it is under trade compliance. Today the ICE issued a disciplinary notice for Merrill Lynch International that entailed a $200K fine. The notice is here.
The notice indicates that the firm had failed to report block trades within the 15 minute reporting window " at various times" of a 4 month period. They also were alleged to have misreported the time of execution of the block trade (which can be a concern - the individual may know the reporting time and attempt to fudge the execution time to cover their failure to report). They also cited that a broker must - for every trade or with by some other standing direction - have explicit direction that a trade may be executed as a block.
Finally, since there appear to be failures in what one might expect to be standard control processes for a brokerage firm, a failure to supervise violation was also referenced.
This is a fairly significant fine for a market compliance issue but it is by no means the largest. It does, however, serve as abundant caution that it is not just trade compliance that can bring significant impacts from the exchange disciplinary process.
Mitsubishi Oil had a large trader loss - the metals desk also had a "failure to supervise" issue at CME
One of the areas DCM has addressed multiple times this year (and last year) is the exchanges increasing trend towards imposing "failure to supervise" fines on the companies where traders have improper behavior. Mitsubishi RTM (the metals trading side - not the oil side) was just fined $250,000 for "failure to supervise". The disciplinary notice had a couple items that you don't always see but that we stress in our review of training programs:
1. The company "failed to properly train one of its traders, a secondee (“Trader A”), who had no prior trading experience, before placing Trader A into a temporary trading rotation to trade futures on NYMEX".
"ailed to provide sufficient training specific to trading CME Group markets, or CME Group trading rules, including disruptive trading, to Trader A. As a result, Trader A attempted to trade through experimentation, resulting in executing disruptive trades that violated Exchange rules."
"The Panel concluded that, pursuant to Exchange Rule 433, (it) was strictly liable for the acts of its employee whose conduct the Panel concluded violated Exchange Rule 575.A."
The trading appears to have been basic spoofing or disruptive trading but the fine indicates the exchange's displeasure with the lack of training. This should be a blueprint for new shops entering US markets or expanding organizations.
The CME notice is here
Disruptive Trading, Spoofing? You don't need to get execution to get fined $800K for "failure to supervise"
The CME issued an $800K fine to a Chicago trading firm for entering orders "mislead..; other market participants with respect to market liquidity, for the purpose and with the effect of artificially decreasing market volatility and the number of other market participants." Note, the violation is for misleading perceptions of liquidity. The CME also noted "In doing so, the (individual) accumulated resting order quantities so large that they would have violated his clearing firm’s risk limits had they been filled, and on several occasions he acquired positions so large they did violate those risk limits." So, not only did the individual mislead the market, the individual mislead the firm.
This is an important distinction. A simple way to consider the difference between risk and compliance oversight arises from this distinction. DCM always stresses in compliance training or in seminars we conduct that there is a simple but profound difference that should be followed:
"The Panel further found that Hard Eight lacked adequate risk and compliance controls. Despite other members of the firm knowing the partner’s trading activity and that the partner’s trading repeatedly caused the firm to post maintenance margin, the firm failed to diligently supervise the partner and allowed the violative trading to continue."
So, the trader was violating your internal controls and you did not examine the activities - you get an $800K fine for "failure to supervise" and also the underlying violations.
By the way, the trader got a $200K fine and a nine month suspension from CME markets - so the company got a 4 times fine for failing to control the trader. A nice round $1 million in total. The company disciplinary notice is here and the individual's notice is here
The CME issued a disciplinary notice to an energy firm for failing to submit block trades with accurate execution times. There are very specific - and short - times for filing block trade reports regardless of whether they are principal to principal or brokered. In this case, the exchange indicated the failure was "multiple block trades in Crude Oil futures to the Exchange with inaccurate execution times. Additionally, the Panel also found that Syntex failed to properly advise and train its employees as to relevant Exchange rules and Market Regulation Advisory Notices (“MRANs”) in a manner sufficient to ensure compliance with Exchange block trade reporting requirements." The fine was $40K. The notice is here.
So we, have two issues - improper reports and failure to supervise. This can be solved in one of two ways:
First, many firms, including some of the largest global energy firms, have adopted a policy of only executing block trades via a broker. When executed through a broker, the block trade reporting obligation falls to the broker - removing the issue for the company. Please remember that the trader entering the order with the broker must designate it is to be executed via a block trade - either by a global instruction that any trade of block size must be executed as a block or by specific instruction that the individual trade must be executed via a block.
Second, companies do perform training - at least annually - for staff who are authorized to perform block trades on a principal to principal basis. DCM has created and performed training of this type for clients. The major points covered are the requirements for a block trade, the mechanics of a block trade, the timing requirements by product, and the exchange portal for block trade filings. Both ICE and CME have electronic portals for filings and the form is standardized.
There really is no reason to have this type of notice and fine if you follow one of these two paths.
Breathtaking example of why reading your exchange brokerage statements is important - fine was really big
The CME issued a disciplinary notice today for a $1.25 Million fine for an individual. The individual was a broker at a firm who entered trades for customer accounts without a power of attorney. As the notice indicates, the customers may have made verbal authorizations for small orders but the individual blew through the risk limits and, in some cases, the financial capabilities of the customers. The total losses exceeded $10 Million, which the brokerage firm repaid (but imagine the mess of sorting that out with your brokerage firm). If any of those customers was confirming their trading on a daily basis, this would not have happened. This is the epitome of the classic "buy and forget" trading strategy - that is how many entities implement "buy and hold".
The trader was fined $1.25 million and barred for life from the exchange or from entering orders on behalf of a customer. The notice is here .
This happens - believe me. DCM staff have been in a situation where a client entered trades after discussions with DCM but did not check their broker statement. DCM was in transit overseas that day and the next. When the statement came in, the order had been doubled. Neither the client or the IB (or so they said) had tapes. The client believed the IB and billed DCM for the loss. We paid rather than go through the costs.
The simple fact is every account should be verified EVERY day before the next day opening of the market. Larger firms should confirm trades in near real time - just because you think that what you asked for is going on doesn't mean it is. Every phone order should be read back in confirmation of the trade. If your traders are not requiring read backs of fills on phone orders - make them. Any phoned in order that is not read back by the broker should be subject to cancellation. Simple risk measures can avoid a major amount of pain.
Two different "disruptive trading" cases had disciplinary notices issued today - the notices are here and here. The notices speak to large layered orders on one side of the market with resulting trades from smaller resting orders on the other side of the market and subsequent cancellation of the layered orders. The fines was $45K in one case and $65K with a $41K+ disgorgement in the other. This is a scenario we have covered on this blog a number of times before.
What DCM wants to reflect on this time is the length of time these cases may have consumed. In one case, the trades were done in November 2017; in the other, January, 2018. The settlement hearing in both cases was August 2019. Even if it took the exchange 6 months to start the investigation that is still over 12 months for this process. That is twelve months of internal, and probably external, legal effort with its associated cost. Twelve months of disruption on the desk with the need for traders to respond to questions. Twelve month of staff going through order level data recreation and analysis.
This process costs soft dollars and likely large quantity hard dollars for outside counsel, It reduces the efficiency of your trading operations.
That is the real impact of trading oversight failures - the long, steady impact on your business. Consider that when you are considering the review of your compliance program.
CME Market Advisory on Block Trading - some changes in Block Trade rules are coming October 1 that have significant impacts
The CME issued an extensive market advisory here that covers the CME/CBOT/NYMEX/COMEX markets. The advisory is 13 pages and the cover note does hit the highlights. Just to make it clear - this is a change to a prior advisory in May and includes all the information in that notice PLUS several new items. These are:
1. If a CME product is block traded in a strategy with a non-CME product (e..g, I trade a block on CME WTI and a block on ICE Brent as a paired set of blocks), the CME leg of the block will be considered as an "outright" on the CME leg and the "fair and reasonable" pricing test for the block will only consider the CME product price. So if the spread would create a CME price that is outside the fair and reasonable range, the block is improper.
2. Pre-hedging advisory content is changed significantly. The points DCM feels are major are:
The ICE getting more active in disruptive trading disciplinary notices - equities market latest area
. Today the Intercontinental Exchange issued a disciplinary notice in the equities markets (Russell 2000). They specifically noted the individual was a "manual trader" The issue was on "multiple instances", the trader acted in "a pattern of placing and layering multiple orders on one side of the orderbook while placing a single order on the opposite side".
Also in keeping with the increased use of disruptive trading - as opposed to "spoofing" - as the offense, the exchange noted multiple impacts from the actions were to "create false depth, put pressure on the market, and mislead market participants into trading against, or moving the market closer to, his opposing single order.".
DCM still sees firms believing spoofing or failure to enter orders with an intent to deliver is only of concern regarding automated trading - either true hugh frequency trading or even OMS based trading processes. The facts would indicate that the majority of case, though smaller fines, are for manual trading activity - and frequently in the pre-open.
The full order is here. The fine was $40K and there was a 1 month suspension from the all ICE US Futures markets.