Citadel Securities LLC agreed to pay a fine of US $70,000 to the Chicago Mercantile Exchange because of its entry of an unspecified number of unintentional orders on Globex on June 3, 2013, because of a “software malfunction.” According to CME Group, Citadel’s order entry miscue prompted it to resend to the exchange orders that previously had been filled, causing an unusual short-term increase in trading volume of the E-mini S&P futures market and its prices. Citadel was charged with engaging in “an act which is detrimental to the interest or welfare of the [e]xchange.” Separately, ICE Futures U.S. fined Trevor Gile—trading as Liger Investments Ltd. —US $25,000 for a “software bug” in its automated trading system on November 5, 2013, that resulted in the entry of “numerous” order messages in the LD1 Fixed Price ICE Lot futures markets. The exchange’s business conduct committee deemed that these excessive order messages were “not made in good faith for the purpose of executing bona fide transactions.” IFUS also claimed that Liger failed to identify the software bug prior to deploying the ATS.
Compliance Weeds: The IFUS settlement is an unexpected application of the exchange’s disruptive trade practice rule that seemingly—on its face—requires an intentional action to be a violation. Under the plain language of IFUS rule 4.02(l)(2), it is prohibited to “[engage] in any … manipulative or disruptive trading practices prohibited by the [Commodity Exchange] Act or by the [Commodity Futures Trading Commission] pursuant to Commission regulation, including, but not limited to … knowingly entering, or causing to be entered, bids or offers, other than in good faith for the purpose of executing bona fide [t]ransactions.” (Click here to access ICE Futures U.S.'s rules.) It is difficult to understand from IFUS’s published disciplinary notice how Liger’s ATS breakdown because of a “software bug” satisfies the intent requirement of this provision. There is another section of the same rule (4.02)(l)(1)(D) that applies a recklessness standard (i.e., the prohibition against practices that constitute the “[r]eckless disregard for the adverse impact of the order or market message”), but it was not used in this disciplinary proceeding.
