ICE US Futures has issued six disciplinary notices in October fining brokerage firms for failing to maintain and, when requested, to produce records of the audit trails for specific transactions. In one of the cases, ED&F Man Capital Markets was fined $2.5K for failing to maintain and produce electronic audit trail records for 4 transactions in 2016. The notice is here - https://www.theice.com/publicdocs/futures_us/disciplinary_notices/ED&F_Man_Capital_Markets_Ltd_2017-066%20.pdf
The fines all were either $2.5K or $5K - very small fines for very large companies. However, the CFTC Rules Review for ICE Futures in 2016 indicated that ICE failed to have documentation of certain necessary portions of their trading review. This pattern of going back and issuing fines to firms that also had documentation issues might indicate that ICE Futures is going to be focusing harder on firm documentation as they focus in on their own documentation.
This is one small reminder that the CFTC Rules Review for the exchanges can also indicate ares where the exchange may be placing greater focus due to the shortcomings the CFTC points out.
Good cause to either go back and review the CFTC reviews or chat with someone who does read them. Happy to have that conversation.
You paid all this money for systems - are you running them right? Today's CME fine says you better be.
The CME just fined Deutsche Bank $75K for a single trade between two accounts that was a wash trade masquerading as an EFRP. They were fined for both violating the EFRP rules and the wash trade rules.
The real kicker was this line in the notice:
Notwithstanding DBAG’s implementation of a multi-tiered pre- and post- execution system to monitor the execution of EFRP transactions, which incorporates front, mid and back office functionality, in this instance DBAG, through a series of mistakes, reported a non-bona fide EFP to the Exchange
This is a fairly large fine for a single action. But it is also an indication that just having the systems isn't enough, especially if the controls then fail in a serial manner to allow a trade that should be caught to go through.
This is a signal indication that training and testing of controls and processes should be something anyone who has installed systems should be focusing on. The mitigation factor of having the systems isn't very valuable if the exchange finds out they aren't being operated properly.
Once again, CME has issued notices imposing fines for disruptive trading. In two separate set of coordinated cases - the first, 16-0582-BC (One for NYMEX and one for COMEX), and another, 16-0475-BC (COMEX for both but two different individuals) - the CME found disruptive trading.
It is interesting in the 16-0582-BC case that the exchange specifically references the trader's algorithm entered the disruptive trades. The fine here was $80,000 (split between the two exchanges) and a four week trading suspension. The fine with only a suspension might indicate the exchange was unsure whether the order activity was intentional or unintentional.
That inference could arise because the other pair of notices cite that both of the traders entered orders with intent to cancel. In these cases the fines were $80K and $60 and a permanent bar on trading activity and membership in a CME market.
I have had clients say one of two things:
You can't spoof a market - especially crude or natural gas - manually; and
It is algos that will get you in trouble.
These cases point out two very important things - first, the exchanges don't believe only algos spoof and that you can be found to be manually spoofing big markets (the second pair of notices covered the COMEX gold futures); and second, they may find intent and correspondingly impose greater penalties on manually entered orders than they do on an algo.
Food for thought
DCM is helping clients design and implement surveillance for these and other types of US exchange and physical market trading activities. We are happy to speak with you at any time.
On September 18, ICE Futures US issued a disciplinary notice for a fine for disruptive trading in the cocoa contract. The fine was for a company for "failure to diligently supervise". The notice states that an employee of the firm "engaged in a pattern of manually placing a single or multiple fully-visible large order(s) on one side of the market while having a smaller order resting on the opposite side. In each instance, Traditum’s employee manually deleted the large order(s) within seconds of the smaller order trading. Therefore, the large orders did not appear to be entered with the intent to trade.
The Subcommittee determined that Traditum may have violated Exchange Rule 4.01(a) in that Traditum had insufficient policies, procedures, and systems in place to train employees and monitor trading activity relative to Traditum’s size of operations and activity on the Exchange.
Fine was $90K. Please note, this was not a fine for the activity but for failure to train and supervise - including " insufficient policies, procedures, and systems". DCM has received increasing inquiries for compliance policy and procedures reviews as well as training sessions. One thing we here from these clients is that senior management does not want to have to explain to investors why they are deemed to have inadequate procedures. In addition, they hear from the exchange during discussions regarding violations that they expect an improvement in these areas.
This has become more of a hot button issue in the last year. The increasing number of failure to supervise or inadequate supervision fines has led firms to realize that an inquiry can expose this risk even if the underlying issue is resolved. It is a good compliance risk control to take a look back to make sure your documentation would stand up to exchange review.