Two apparently related non-members of the Chicago Mercantile Exchange agreed to be permanently barred from ever trading on CME Group exchanges and to remit trading profits of US $407,491 for allegedly trading on misappropriated information.
According to CME, between January 2011 and October 2012, Stuart Madden disclosed non-public order information of his employer to Paul Madden, and Paul Madden used that information to establish positions in Euro FX futures positions that he often offset through trading opposite the employer’s account.
In an unrelated matter, Aardvark Trading LLC agreed to pay a fine of US $205,000 to the CME because of two incidents with its automated trading systems. CME claimed that on November 13, 2014, an Aardvark ATS did not function as intended because of “improper configuration and modification of the ATS’s code” that caused the execution of 17,000 contracts in the associated legs of the Eurodollar complex. This, said CME, caused price and volume “aberrations” over a nine-second period. Also, charged CME, on “several occasions” in June and October 2014, “ATSs that Aardvark operated did not operate as intended as a result of supervisory errors,” although there was no “significant” market impact.
Aardvark also agreed to pay a separate fine of US $40,000 to the Chicago Board of Trade because of alleged configuration errors and a failure to deploy self-match prevention technology that caused numerous self-matched trades, as well as price and volume “aberrations” on July 6, 2015 in the September 2015 Two-Year Treasury futures contract.
Similarly, Natixis agreed to pay a fine of US $75,000 to resolve CBOT charges that one of its automated trading systems allegedly entered incorrect orders in 29 Federal Futures contract months causing “aberrant prices.” According to CBOT, at least part of the cause of Natixis’ incorrect orders arose from the failure of an employee to deactivate a certain pricing tool associated with its ATS.
In addition, Noble Resources Pte. Ltd., a CBOT member firm, agreed to pay a fine of US $75,000 for engaging in pre-execution communications with a counterparty related to proposed soybean futures hedges in connection with the execution of prepaid soybean swap agreements. Under CME Group rules, pre-execution communications involving soybean futures are not permitted.
Legal Weeds: Earlier this year, a panel of the Business Conduct Committee of the New York Mercantile Exchange found that, from April 18 through December 10, 2012, Jon Ruggles, a nonmember and former trader for Delta Airlines, traded two accounts of his wife, Ivonne Ruggles, relying on confidential information of his employer in a manner that disadvantaged it. The BCC concluded that as a result, Mr. Ruggles earned in excess of US $3.3 million as a result of his unauthorized trading. In response, the BCC imposed a fine of US $500,000 against Mr. Ruggles, ordered disgorgement in excess of $2.8 million, and imposed a permanent CME Group all-products trading prohibition. (Click here for more details regarding this CME Group disciplinary action in the article, “Trader Sanctioned Over US $3 Million by CME Group for Trading on Confidential Employer Information; Both He and Wife Barred From Exchange Trading” in the June 19, 2016 edition of Bridging the Week.) Later, in September 2016, the Commodity Futures Trading Commission brought and settled charges against Mr. Ruggles for the same offense, claiming that Mr. Ruggles’ conduct constituted trading on illicitly misappropriated information, and based its action, in part, on a theory equivalent to the securities concept of insider trading. (Click here for details, in the article, “Ex-Airline Employee Sued by CFTC for Insider Trading of Futures Based on Misappropriated Information” in the October 2, 2016 edition of Bridging the Week.) The disciplinary actions against Stuart and Paul Madden rely on an express CME Group rule that prohibits inducing any person from disclosing non-public trading information to another person or from taking any action based on non-public information no matter how acquired (click here to access CME Group Rule 532). However, it may not be too long before the CFTC applies the relatively new provision of law and CFTC rule that prohibits employment of a manipulative or deceptive device or contrivance in connection with futures or swaps trading that it relied on in its enforcement action against Mr. Ruggles as authority to bring an enforcement proceeding against a trader who not only misappropriates trading information and passes it illicitly to another, but also against the recipient of illicitly-obtained information who trades on it – a so-called “tipper” and “tippee” scenario. (Click here to access Commodity Exchange Act Section 6(c)(1), US Code § 9(1), and here to access CFTC Rule 180.1. Click here for a discussion of a recent federal appeals court decision regarding tipper and tippee liability under US securities law in the article, "Appeals Court Sets Aside Insider Trading Convictions Saying Traders Distance From Corporate Insiders Too Far" in the December 14, 2014 edition of Bridging the Week.)
Compliance Weeds: Generally, for approved contracts only, CME Group exchanges permit pre-execution communications to facilitate trading subject to strict requirements. Among these requirements are that the party on whose behalf a communication is made previously consented to such communication and that no person involved in pre-trade communications takes advantage of information conveyed except to facilitate the relevant trade. Other than for CBOT EU Wheat futures and options, pre-execution communications are never permitted for CBOT grain and oilseed futures at any time. Moreover, CME Group rules regarding cross trades vary by product and by futures and options. Even the mechanical steps vary for executing a cross trade following a conversation. There are Globex Crosses, Agency Crosses, Committed Crosses, and RFQ and RFC Crosses. (Click here to access the relevant CME Group Market Regulation Advisory Notice regarding Pre-Execution Communications (August 16, 2016).) However, despite the complexity, the consequences of getting it wrong can be severe, resulting in not only potential CME Group sanctions, but possible sanctions by the Commodity Futures Trading Commission too. (Click here to access the article “CFTC Fines FirstRand Bank for Unlawful Pre-Execution Discussions Related to Soybean Futures Trades” in the September 1, 2014 edition of Bridging the Week.) Most simply, all noncompetitive trades are strictly prohibited under CFTC rules, and any violation of a CME Group rule regarding pre-execution communications could also be deemed a violation of this CFTC requirement.