Friday CME disciplinary notices - 4 notices, $2.465 million in fines - some concerning points in several
.CME issued multiple disciplinary notices Friday - one for $2MM, two in the 100's of thousands, and one for $10,000. The last was for orders placed in the pre-market for spread trades that the CME felt the trader should have known would cross trade based on market size and pricing.
The $2MM dollar fine was for an agricultural firm that reads in a similar fashion to the Kraft case settled in 2019. In this case, the firm of Andersons Inc. registered certificates (i.e., rights to ship physical wheat under a futures contract) in excess of the limited number (600) allowed without "bona fide commercial purpose" and be granted an exemption under from the Market Regulation Department. The notice also points out that The Andersons held over 60% of the open short position in the applicable contract. Finally, the Andersons also sold the product under the contract to local wheat mills for the moth prior to their contracts to suppress demand.
The CME noted that The Andersons, by means of these actions, were able to buy back 1,330 of the 2,000 registered certificates at lower prices than they were originally registered.
Again, the basic format is similar to that described in Kraft - take a position in the futures market and then craft a strategy for disrupting the physical market for delivery of those contracts in a manner that allows the firm to capitalize on the market impacts of caused by their position in the physical market on the futures contract physical delivery mechanisms. So, even though the alleged scheme is not manipulating the trading of the futures contract, it is disrupting the capture of value in the resulting physical delivery mechanism.
For those reasons, the disciplinary comimittee found the actions to violate the following provisions of the "General Offences" Rule (Rule 432) - the notice is here:
"B. 2. to engage in conduct or proceedings inconsistent with just and equitable principles of trade;
Q. to commit an act which is detrimental to the interest or welfare of the Exchange or to engage in any conduct which tends to impair the dignity or good name of the Exchange;
T. to engage in dishonorable or uncommercial conduct."
The second large fine was for actions of Exante Limited - a Malta based fintech firm whose website indicates they are a "Next Generation Investment Company" providing a multi-asset trading platform. Unfortunately, the firm did not do some basic things properly according to the disciplinary committee. The list of problems was extensive:
1. Improper customer set up, resulting in improper account netting - impacting open interest reports from the exchange; and
2. Failure to assign unique Tag50s (a point DCM harps on frequently) to both employees and customers; and\
3. Performing wash trades to transfer positions between clearing firms - another common violation; and
4. Failure to "fully answer regulatory inquiries"
All of this added up to violations warranting a $350K fine for wash trade, Tag50, and failure to supervise violations. The notice is here
The final large fine was imposed on Algolab.com Inc. They operate a proprietary trading shop as well as licensing their software to customers for purposes of entering orders on their behalf. The software allowed orders to exit positions to be entered without regard to market liquidity. The orders "on two occasions" triggered unrelated stop orders, causing additional disruption. These disruptions had the impact of triggering a trading halt on the entire Swiss Franc futures and options trading product group.
More disturbingly, the committee also found, due to "technical reasons", the Algolab product would prioritize Algolab's proprietary trade orders before customer orders - both for entering and existing positions. Algolab also utilized the customer's Tag50 IDs, rather than its own, to enter trades. Algolab was fined $105K - the notice is here