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.