The Commodity Exchange, Inc. filed a disciplinary action against Mirus Futures LLC (now known as Ninja Trader Brokerage), claiming that on January 6, 2014, the firm failed to monitor the functioning and connectivity of its trading platform with CME Group’s Globex electronic system. According to the exchange’s notice of disciplinary action, “[t]his failure resulted in unusually large and atypical price activity …which resulted in a disruptive and rapid price movement in the February 2014 Gold Futures market and prompted a Velocity Logic event.” (Generally, a velocity logic event occurs when the market moves a predetermined number of ticks up or down within a predefined time and prompts a temporary pause in trading; click here for details.) COMEX charged Mirus with failure to supervise and conduct detrimental to the exchange. The firm settled with COMEX by agreeing to pay a fine of US $200,000. Separately LCM Commodities, Inc. agreed to pay a fine of US $95,000 to the New York Mercantile Exchange for allegedly executing “numerous” block trades for customers from November 2012 through April 2013 and not reporting such transactions within required time frames and failing initially to report accurate trade details. In addition, Simon Posen agreed to pay a fine of US $75,000 and be suspended from accessing any CME Group market for five weeks because of his entry of “numerous” orders in gold and crude oil futures from September 2013 through February 2014 without the intent to trade, but to induce other market participants to trade against smaller orders of his on the opposite side of the market. When these smaller orders were executed, Mr. Posen cancelled his other orders within one-second claimed COMEX and NYMEX. Similarly, Raphael Kurlansik agreed to be fined US $35,000 by NYMEX and be suspended from accessing any CME Group market for 10 business days for allegedly entering large orders in heating oil futures on multiple days in June and July 2014 to also induce market participants to trade opposite smaller orders he had resting on the opposite side of the market. After receiving a fill on his smaller orders, Mr. Kurlansik canceled his large orders within one half second, claimed NYMEX.
Compliance Weeds: The Mirus Futures settlement serves as a reminder to firms of their obligation to ensure that their automated trading systems are functioning reliably at all times. Although exchanges may not have express provisions requiring firms to maintain robust ATSs, they will use a variety of provisions to prosecute firms if a breakdown in a system impacts a market detrimentally – including possibly charging a firm with disruptive trading itself. (Click here for more details in the article “CME Group and ICE Futures U.S. Each Fine a Trader for Automated Trading System Malfunction” in the March 29, 2015 edition of Bridging the Week.) Both the Financial Industry Association and the Futures Industry Association recently have published best practices for firms in connection with their ATSs. (Click here for details in the article “SEC Proposes FINRA Oversee Certain High-Frequency Trading Firms; FINRA and FIA Issue Best Practice Guidance” in the March 29, 2015 edition of Bridging the Week.) Firms with ATSs should review these best practices and adopt as many as practical.