In two cases of first impression, CME Group exchanges brought and settled charges against a company for alleged disruptive trading activities by its employee, and against another company and its employee for the employee’s alleged pre-hedging of block trades entered into for his employer.

In a disciplinary action brought by the New York Mercantile Exchange, Banco BTG Pactual, S.A. agreed to pay a fine of US $50,000 for the alleged disruptive trading activities of an unnamed employee. According to the exchange, on multiple occasions from January 2013 through February 2014, the employee entered into orders in Palladium futures contracts on one side of the market without the intent to trade. Instead, said NYMEX’s Business Conduct Committee, the orders were entered into to induce market participants to trade opposite smaller orders entered by the trader that were resting on the opposite side of the order book. The trader allegedly cancelled the larger orders on one side of the market after he obtained fills of the smaller orders on the other side. NYMEX’s BCC said, “BTG failed to ensure that its trader conducted these trading activities in compliance with exchange rules.”

In another disciplinary action brought by NYMEX, Koch Supply & Trading, LP and its trader Arian Fouquet settled charges alleging that, on four dates in January 2014, Mr. Fouquet used CME Group’s Globex platform to pre-hedge block trades with a proposed counterparty, prior to concluding such transactions with the counterparty.

NYMEX specifically claimed that, after being solicited to enter into a block trade, Mr. Fouquet pre-hedged the proposed transaction on Globex in order to lock in a potential profit for his employer. This violated CME Group’s prohibition against using nonpublic information regarding block trades prior to execution.

To resolve this matter, Koch agreed to pay a fine of US $50,000 and disgorge profits of $51,315.60. Mr. Fouquet agreed to pay a fine of US $15,000 and be barred from trading CME Group products for five business days.

In other disciplinary actions, Wolverine Trading, LLC settled charges related to the alleged breakdown of its automated trading system and unintended self-matches.

In one action brought by the Chicago Mercantile Exchange, Wolverine agreed to pay a fine of US $125,000 for an alleged breakdown of its ATS on March 21, 2014, that resulted in the firm sending over 27,000 resend requests to the exchange (a resend request is a repetitive transmission to the exchange of the same message (e.g., order, request for quote); it can increase latency for other traders). Apparently, the exchange endeavored to contact Wolverine on the relevant date to ameliorate the situation, but was unsuccessful; the exchange ultimately closed all of the firm’s access ports to it in order to stop the resend requests. According to CME’s BCC, “Wolverine’s monitoring and internal notification processes were insufficient to recognize or stop the ATS from continuing to submit resend requests.”

Wolverine also settled charges in response to three separate disciplinary actions brought by the Chicago Board of Trade, CME and NYMEX, that on “several occasions” in 2012 and 2013 it failed to prevent buy and sell orders generated by its ATS from crossing. The relevant BCCs found that, although the firm’s ATS was not “designed to execute self-matches,” Wolverine should have reasonably anticipated that orders entered by the ATS would match. The BCCs found that Wolverine did not implement “effective functionality” to avoid self-matches. Wolverine paid US $125,000 in aggregate to resolve these matters.

CME Group also announced settlements of three other matters involving alleged disruptive trading practices. Two involved William Silva, who settled his actions by agreeing to pay an aggregate fine of US $75,000 and to incur a two-week CME Group trading suspension. The other involved Michael Franko, who settled his matter by agreeing to pay a fine of US $100,000 and to serve a three-week CME Group trading suspension.

Finally, two firms – Blenheim Capital Management, LLC and Noble Americas Corp. — agreed to settle charges they engaged in improper exchange for related position transactions by not having proper documentation to support the related position, or not transferring the related position between the two parties. Blenheim agreed to pay a fine of US $10,000 in connection with two EFRPs, while Noble, in connection with two disciplinary actions, agreed to pay fines in aggregate of US $30,000 for two EFRPs too.

Compliance Weeds: Rules on block trades are detailed and must be followed strictly. CME Group Rule 526, for example (click here to access), expressly prohibits “[p]re-hedging or anticipatory hedging of any portion of a block trade in the same product or a closely related product based upon a solicitation to participate.” Moreover, parties involved in the solicitation or negotiation of a block trade may not disclose any elements of those discussions to any other party except as necessary to consummate the transaction. In general, parties with access to nonpublic information regarding a block trade may not trade in the same product or any closely related product to take advantage of such knowledge in advance of the public report of the block trade to the exchange. This prohibition is not meant to preclude parties from trading in their ordinary course, however. (Click here for the latest CME Group advisory notice regarding block trades.)