Michael Schneider, a non-member, settled charges brought by the New York Mercantile Exchange that he engaged in prohibited disruptive trading practices when, on multiple occasions, he used wash blocking technology to cancel pending orders on one side of the market while placing an aggressive order on the other side of the market. According to NYMEX, Mr. Schneider’s use of the wash blocking feature, caused other persons’ orders to immediately elevate in queue status, and become executable against his new aggressive order. NYMEX claimed that Mr. Schneider engaged in this type of trading activity – flipping his orders – from March through September 2015, and his conduct was undertaken with the intent to disrupt, or with reckless disregard for the adverse effect of his orders on the marketplace. Mr. Schneider agreed to pay a fine of US $45,000 and serve a 10-day all CME Group trading suspension to resolve this matter.

Yongzhi Financial Investment Co., another nonmember, separately agreed to pay a fine of US $55,000 to resolve charges by the Commodity Exchange, Inc., that, from January 1 through February 5, 2016, it failed to diligently supervise two of its traders. COMEX claimed that, during this time, the traders executed “a series of trades” between accounts owned and controlled by Yongzhi involving copper futures.

Compliance Weeds: CME Group’s prohibition against engaging in disruptive trading practices includes four distinct violations: (1) placing an order with the intent to cancel or modify the order to avoid execution; (2) entering one or more actionable or nonactionable messages with the intent to mislead other market participants; (3) entering one or more actionable or nonactionable messages with the intent to impede the exchanges’ systems or other market participants; and (4) entering one or more actionable messages with the intent to disrupt, or with reckless disregard for the adverse effect of the message(s) on, the “orderly conduct” of trading or “fair execution of transactions.” (Click here to access CME Group Rule 575 included in the relevant Market Advisory Regulatory Notice.)

CME Group has employed this last prong in a number of circumstances, including one surprising one. Earlier this year, Saxo Bank A/S, a member firm, agreed to pay an aggregate fine of US $190,000 to the Chicago Board of Trade and the Chicago Mercantile Exchange to resolve two disciplinary actions against it for the way it liquidated futures positions of its customers that were under-margined. According to the exchanges, on multiple dates between October 2014 and March 2015, Saxo employed a liquidation algorithm that automatically entered market orders for the entire amount of an under-margined customer’s positions. The exchanges said Saxo Bank did so without considering market conditions and therefore violated the last prong of its disruptive trading practices rule. (Click here for background in the article “CME Group Settles Disciplinary Action Alleging that Automatic Liquidation of Under-Margined Customers Positions By Non-US Futures Broker Constituted Disruptive Trading” in the March 20, 2017 edition of Bridging the Week.)

Persons entering orders on CME Group (and other) exchanges must be mindful of the potential impact of their orders on the marketplace and avoid actionable or nonactionable messages that are likely have a disruptive impact on the marketplace.