The NYMEX issued a disciplinary notice today here relating to Rule 575.D - Disruptive Trading Prohibited. In this case the trader was creating "user defined spreads" ("USD") on Globex. A USD is enabled on Globex to allow trading of option spreads against the underlying in a manner that, as implied, the trader defines. In particular, a trader can define the delta of the option being traded and allocate the futures against that covered option strategy in the USD. The NYMEX disciplined the trader "for the purpose of receiving advantageous over-allocations or under-allocations of futures contracts that should have been associated with the covered options instrument."
There have been comments by other individuals covering CME disciplinary notices that the notices do not provide the information necessary to use the notices as training exercises - unlike notices from other regulatory entities. DCM likes to note that CME discipline is conducted under the Rule Book enforced under the contractual agreements between the participants and the exchange. Regulatory notices are normally issued under administrative law rules and, as such, may have much greater public documentation requirements. Developing controls on US exchange disciplinary notices takes greater individual research and analysis.
Greater information would be helpful in this case. The NYMEX notes that "Although the CME Globex system provides certain protections such as reasonability checks with respect to option deltas and the futures price on covered instruments,the UDS functionality requires users to exercise diligence and care in the creation of option spread instruments, including the creation of covered option strategies."
DCM acknowledges that this type of deception has not been a central part of its prior compliance training. Like we like to note frequently, traders tend to go where their actions are less likely to be observed when they want to stretch the controls. This is a place where it is likely firms will have to up their game.