The CME, earlier this month, issued a number of disciplinary orders about the same issues we have covered multiple times in this blog - wash trades, spoofing, and failure to supervise. We will look at these cases but a note about how DCM choses what to cover on this blog.
There have been a number of very large cases - nine or ten digit fines (without the decimal point) - in the last couple months. They have not, for the most part, been covered here. The reason for this is the majority of our clients (yes, we have worked with and continue to work with some of the largest trading entities in the world) are shops that are entering markets or entering US markets in a smaller manner. Those multi-year, global expanse cases tend to be met with "that isn't us and we never intend to be that" response. The "it can't happen here" is a very valid response for these strategies.
But the $30K or $100K fines for small companies - these resonate. And the purpose of this blog is to give the smaller firms - even those that seem themselves solely as hedgers and not "traders" - examples of behavior or practices that are on their scale. If that scale translates into more effective supervision and appropriately scaled compliance and risk operations, that has achieved the purpose of this blog. So, climbing down off the soapbox and back into compliance review, the notices of interest are:
1. A firm was fined $25K for "failure to supervise" in reagrds to staff entering trades "executed opposing buy and sell orders in December 2019 Silver Options for which there was common beneficial ownership on both sides of the transactions." The intent? Executing " buy and sell orders with the knowledge and intent that the orders would trade opposite one another, for the purpose of closing positions." The finding was the firm "failed to properly advise and train its employees as to relevant Exchange rules and Market Regulation Advisory Notices (“MRANs”) regarding wash trading." Traders may be tempted to use wash trades to shift positions between books - especially using an affiliate book to stash the trades - to manage risk limits. There is no better way to point out the limits of your risk analysis (and put the CRO in jeopardy) than to get a fine for shifting positions. This scenario has happened enough times to be on every compliance officers radar - and yet still we see this issue. There can be fairly simple ways to detect this - it just takes allocating resources and effort to detect this. The notice is here.
2. A prop trading company was fined $200K (split 50/50 by NYMEX and COMEX) for failure to supervise the actions of its traders. The traders hit the trifecta - they shared TAG50 IDs (trader log in IDs) which is a significant issue for exchanges, they spoofed markets over a one year period, and they failed to answer the charges of the disciplinary committee. That last is a common item we see from non-US based clients - we are in country X, they don't have jurisdiction over us. As this blog has harped on multiple times - they have jurisdiction the second you sign your brokerage agreement. You cannot trade US futures markets on US exchanges without accepting US jurisdiction in your brokerage agreement. Accept that the exchange and CFTC jurisdiction is global (and when we have space stations with people trading there it will be interplanetary). The fine ,as noted was $200K and the firm was barred from trading any CME market for five years. The COMEX notice is here.
Again, these aren't the big splashy cases but the do represent what the average participant in the market can be facing in their activities if they don't manage their compliance risk.