A number of disruptive trading fines from CME last week and a couple wash trade fines today (one of note). The disruptive trading fines are illustrative because they all point to two things that all traders (and firms) should keep in mind:
1. Any order placed on the market has to be reasonably executed within the standing liquidity in the market. If the trade is really big (doesn't even have to be flash crash big, that can be disruptive trading); and
2. There is a reason the exchanges have made block trades available - they are a mechanism to allow large trades to be executed without disrupting the market.
In the first case, Interactive Brokers was fined $275K across CBOT, NYMEX, and COMEX with $100K going to CME (the CME notice is here). The exchange response was based on:
"IB implemented customer order routing functionality that bypassed CME Group market integrity controls. Specifically, in several cases, this functionality enabled its customer orders to avoid protection points applied to all market orders by CME Group’s Globex platform in reckless disregard for the adverse impact on the market. These protection points are designed to prevent extreme price movements and other market disruptions"
"IB caused various Equity and Agricultural markets, including the E-mini Nasdaq-100, E-mini S&P 500, Nikkei/Yen, Live Cattle and Cash-settled Butter futures markets, to experience price, liquidity and trade volume aberrations and Velocity Logic events."
You can't just find a way to get trades executed any way you want - that is not how the exchanges work.
The second case is a smaller incidents that still resulted in a $40K fine - notice here. The CME did point out one specific case:
"For example, on April 18, 2016, (the company) entered a 100-lot sell market order into a Live Cattle market that displayed 33 contracts in aggregate at the top five book levels on the opposite side of the market. R&B’s order was filled across 19 unique prices. Within one second, R&B continued to enter multiple market orders that caused additional significant and disruptive price breaks in the market in a short period of time."
Here is a case where a block trade size order was 3 times the top five resting orders on the other side of the book. The CME found that to be "disruptive"
The final disruptive trading case was an $85K fine - the notice is here. It has the combination of disruptive trading with that all too present "failure to supervise" kicker. In this case, it was failure to supervise an automated trading system.
"Specifically, during this time period, an (company) automated trading system (“ATS”) engaged in a pattern of activity wherein it entered multiple opposing orders at various price levels near the start of the pre-open, provided significant liquidity to the order book in these markets, and then subsequently cancelled all or a majority of the orders near the end of the pre-open just prior to the no-cancel period, causing impacts to the Indicative Opening Price (“IOP”) and/or fluctuations in the bid-offer spread."
The company was notified by Market Regulation of the issue, made changes and redeployed the system with the same continuing flaw. The CMA followed up with:
"The Panel also found that (the company) failed to diligently supervise its ATS in the conduct of its business relating to the Exchange."
The last settlement to note is a pair of wash trade notices. The point I wish to note is the fines were $25K for the trader for the wash trade and $85 for the company for the trade and for failure to supervise - the company notice is here. Two takeaways here:
1. This was a single 9,762 options wash trade between two affiliates accounts - trades of this size might show up on someone's alerts; and
2. The trade was done to "alleviate margin pressure" which should have been likely to flag a risk alert.
Both of these point to potential breakdowns in oversight on the compliance and risk side. This is just one more opportunity to point out the interconnection between risk and compliance as complementary, not competing, functions.