CME Group brought and settled disciplinary actions against Geneva Trading USA, LLC and two of its employees – Krzysztof Marzec and Robert Kimmons – for engaging in alleged spoofing-type activities on the New York Mercantile Exchange, Inc. and the Commodity Exchange, Inc. from March 2013 through July 2013. Geneva Trading is both a COMEX and NYMEX member.

According to CME Group, during this time, both Mr. Marzec and Mr. Kimmons on NYMEX, and Mr. Marzec alone on COMEX, purportedly engaged in a “pattern of activity” where they entered large-sized orders for futures contracts on one side of the market, and cancelled them “several seconds” after smaller-sized orders they placed on the other side of the market were executed. CME Group claimed that these individuals placed their larger orders to induce other market participants to trade opposite their smaller orders. To resolve his COMEX and NYMEX charges, Mr. Marzec agreed to pay aggregate fines of US $90,000 and to serve a 20 business day all CME Group exchanges access suspension; while Mr. Kimmons agreed to pay a US $60,000 fine and serve a 10 business day all CME Group exchanges access suspension to resolve his NYMEX charges. Both individuals were charged by CME Group with violating just and equitable principles of trade and related provisions. (Click here to access CME Group Rules 432 B.2., Q and T.)

Geneva Trading was also charged with violating just and equitable principles of trades and related violations, but solely on a strict liability basis for the actions of its two traders. To resolve the CME Group disciplinary actions against it, Geneva Trading agreed to disgorge aggregated COMEX and NYMEX trading profits of US $91,241.

Unrelated, Manoj Jindal, a nonmember of the Chicago Board of Trade, agreed to pay a fine of US $75,000 and serve a 30-day all CME Group exchanges access suspension for allegedly engaging in spoofing-type transactions on “certain days” during July through November 2013.

In addition, Larry Johnson, a nonmember of the Chicago Mercantile Exchange, was charged with engaging in three wash trade transactions and initially misallocating certain trades during December 2013 and January 2014 to avoid maintenance margin requirements. He settled his CME charges by agreeing to pay a fine of US $35,000 and serving a five-day all CME Group exchanges access suspension.

Finally, two nonmember firms, Aspire Commodities LP and Goldman Sachs Asset Management, resolved charges that they violated exchange-set position limits. Aspire agreed to pay a fine of US $35,000 to resolve its disciplinary action, while GSAM agreed to pay a sanction of US $40,000.

Compliance Weeds: The disciplinary actions against Geneva Trading marked the first time CME Group has ordered disgorgement of profits based on strict liability.

For purposes of the applicable CME Group rule dealing with strict liability, “the act, omission or failure of any official, agent, or other person acting for any party within the scope of his employment or office shall be deemed the act, omission or failure of the party.” (Click here to access the full text of CME Group Rule 433.)

In a Market Regulation Advisory Notice entitled Supervisory Obligations for Employees (click here to access MRAN RA1517-5), CME Group notes that, under one of its rules, “it is an offense for any party to fail to diligently supervise its employees and agents in the conduct of their business relating to the CME Group Exchanges” (Click here to access CME Group Rule 432.W.) Importantly, in this MRAN, CME Group makes clear that agents include not only natural persons, but “any automated trading systems … operated by any party.”

However, in the same MRAN, CME Group suggests that for purposes of its strict liability rule – the same rule relied on in the Geneva Trading disciplinary actions – “agent” may also include an ATS. Under CME Group interpretation, ATSs include a computer system that generates and/or routes messages without human intervention – ATSs are not just black boxes! (Click here to access CME Group MRAN RA1610-5 – CME Globex Tag 50 ID Requirements.)

Member and nonmember firms using proprietarily developed or third-party ATSs must be aware of these CME Group regulatory provisions and guidance should an ATS they use malfunction and disrupt the marketplace. Moreover, they should consider what steps they might take in advance to minimize the likelihood of a potential problem given CME Group’s apparent views.