CBOT and CME Disciplinary Actions
In a rare current disciplinary action involving floor-trading, the Chicago Mercantile Exchange brought and settled disciplinary actions against five individuals associated with the same broker association, four of whom allegedly traded customer orders opposite each other without complying with strict exchange rules that permit such trading with severe restrictions.
According to a CME Business Conduct Committee panel, on numerous occasions between September 2015 and December 2016, four members of a single broker association traded customer orders opposite other members of the same association that were improperly verified as being at the best and only bid and offer at the time. This apparently was done to avoid volume percentage limitations members of the same broker association may trade opposite each other without being subject to mandatory fines (click here to access CME Rule 515.E).
The BCC charged that one runner and trade checker for the association, John Calarco, was responsible for improperly documenting customer orders to conform to the exchange’s requirements and on one or more occasions, along with another non-member employee, endorsed and submitted trading documents to Market Regulation with fabricated witness signatures. For this, John Calarco agreed to pay a fine of US $10,000 and be suspended from access to all CME trading venues for two years.
In addition, Frank Calarco and Philip Mansfield, principals of the association, agreed to pay fines of $47,500 and $77,5000 respectively. Each was charged with failure to supervise their association’s member and non-member employees. Moreover, Mr. Mansfield was also alleged to have executed one Eurodollar option order on September 23, 2015 against another broker in a non‑competitive fashion. To resolve the disciplinary actions against them, John Calarco also agreed to a 30-business day trading venue access suspension, while Mr. Mansfield agreed to a 40-business day time out.
Finally, Andrew Schwieters and Joseph Cosenza, other members of the association, also agreed to pay fines of US $10,000 and $15,000 respectively for their alleged role in this matter, and to serve trading suspensions of five business days and 20 business days, respectively. Mr. Cosenza was also alleged to have to have engaged in a separate non-competitive execution of a Eurodollar option order on September 23, 2015 against another broker in a non-competitive fashion.
Unrelatedly, Coastland Capital LLC agreed to pay a fine of US $15,000 for allegedly entering into a transitory exchange for a related position transaction on April 5, 2016. According to the CME BCC, as part of its EFRP transaction, Coastland bought E‑mini S&P 500 futures contracts and sold SPDR S&P exchange‑traded fund (SPY) contracts. Contemporaneously against the same counterparty, Coastland allegedly sold the SPY contract and bought other contracts. The CME BCC claimed that, as a result, Coastland did not incur market risk related to the SPY contracts. Also, Nidera US LLC consented to pay a fine of US $40,000 for violating position limits from the close of business one day through the next when it liquidated its overage in connection with a disciplinary action brought by the Chicago Board of Trade.
ICE Futures U.S. Disciplinary Actions
Separately, Arlington Commodities LLC agreed to pay a fine of US $10,000 for entering into a block trade when it was alleged it was not an eligible contract participant, as required. Additionally, ED&F Man Capital Markets, Inc. consented to pay US $100,000 for purportedly not conducting adequate due diligence to ensure that one of its customers that executed a block trade was an ECP. ED&F Man also agreed to implement procedures to verify that its customers are ECPs before permitting them to engage in block trades. Finally, Wedbush Securities Inc. consented to pay a fine of US $10,000 for not timely filing a copy of its annual certified financial statement with the exchange.
Compliance Weeds: On CME, three contracts – Eurodollar options, Eurodollar MidCurve options and S&P 500 price index futures – are subject to strict rules to accommodate members of broker associations that may trade opposite each other in trading pits. Most basically, members of a broker association cannot trade opposite each other for more than a designated volume of their trading without incurring mandatory fines. However, trades executed between members of a broker association will not be counted towards such volume thresholds if one member was the best and only bid at the time, and the other was the best and only offer. Another member or exchange official present at the time must sign the relevant member’s trading record attesting that these conditions were met, and provide the information to Market Regulation. (Click here for further details regarding trading in so-called “restricted contracts” in the applicable CME Market Regulation Advisory Notice.) CME Group closed all of its New York trading floors in 2016 and most of its Chicago trading floors in 2015 (click here for background).