The CME is on the Enforcement Warpath!
By CubeLogic’s Shane Henley, Global Head of Monitoring Solutions
January 20, 2023
With almost 40 enforcement cases announced between the beginning of December 2022 to mid-January 2023 (a total which excludes summary actions) reaching just shy of $2million in fines, it seems that the CME has significantly ramped up its enforcement efforts. What should firms trading on CME venues such as NYMEX, CBOT and COMEX know about this wave of enforcement? Keep reading below.
For those who follow these things, you may be used to a steady, moderate flow of enforcement actions from the CME. This has changed in recent months and time will tell if this a new normal or whether this was simply a build-up of 2022’s investigative outcomes. Below are some of the themes to emerge from these cases which should be of interest to any organisation trading on the CME.
Failure to respond to surveillance team requests for information (RFIs) or failing to appear before the Exchange Board is the surest way to get banned from trading.
During this period, 20 individuals received permanent (15) or temporary (5) suspensions from trading on any CME venues or affiliated platforms (such as SEFs) and brokers. The vast majority of these suspensions stem from the defendants not responding to RFIs relating to suspicious trading behaviour from the exchange, or for not appearing at scheduled Board hearings or other interviews set up by the exchange as part of the investigation process.
Notably, none of the suspensions relate directly to, or mention, a corporate entity. Perhaps this is a logical reflection of the fact that the more comprehensive and robust compliance frameworks maintained by corporate trading entities are less likely to fail to respond to RFIs. Still, this should serve as a reminder to corporate trading entities of the importance of promptly responding to exchange queries, and having controls in place to ensure that none “fall through the cracks”.
The Double and Triple Tap – the same (mis-)behaviour across NYMEX, COMEX and CBOT will earn multiple penalties
The CME penalised the same traders multiple times for the same or similar breaches across multiple CME Group trading venues i.e. Pre-arranged trading on NYMEX is treated as a separate but related enforcement case if also detected on COMEX and/or CBOT. There are five such instances of this phenomenon during the period in question.
Those responsible for transaction surveillance should consider the ramifications of these enforcement patterns and consider how to ensure that their transaction surveillance solutions identify repeated behaviour by the same trader. This is particularly important where transaction surveillance responsibility is bifurcated between surveillance officers or surveillance teams by CME venue.
The current enforcement “flavours” include Prearranged trading, Placing orders with no intention to trade and Wash trading
As is often the case with CME enforcement actions, instances of the same patterns of behaviour are frequently punished en masse across multiple trading parties. This batch of enforcement cases is no exception.
Prearranged trading (i.e. Rule 539. “Prearranged, Pre-Negotiated and Non-competitive Trades Prohibited”) was enforced in 11 separate cases. Unfortunately limited details of the alleged behaviour was provided in the CME’s disciplinary action notices which focussed more on the defendants’ respective failures to respond to the RFIs. Regardless, this is a well established pattern of abusive behaviour recognised under most anti-abuse regimes including MAR and REMIT in the EU. Most transaction surveillance solutions have some capability to detect it. If not, this should be reviewed as a matter of urgency for those firms with active trading on CME venues given that the CME clearly has the technical capacity to effectively identify such behaviour.
Likewise, placing orders with no intention to execute (i.e. Rule 575 A “No person shall enter or cause to be entered an order with the intent, at the time of order entry, to cancel the order before execution or to modify the order to avoid execution”) continues to be a perennial bugbear for the CME, and an activity that they continue to persistently punish with no fewer than eight examples during the period in question. This particular rule should be of elevated concern for firms active in algorithmic trading on CME venues – particularly those algorithms with aggressive order adjustment cycles which aim maintain a specific position in the order book. Similarly, reminding traders that all orders must carry an intent to execute should be a regular and repetitive element of Front Office compliance training.
Finally, three cases of Wash Trading were penalised during the period. Wash Trading is well understood by most compliance officers and many exchanges offer pre-trade controls to help prevent such behaviour from occurring.
The specifics of one such case in the recent batch from the CME make for interesting reading. The defendant entered actionable messages in various Natural Gas and Crude Oil futures contracts with the alleged intent to mislead other market participants in order to receive a favourable price. By “layering” orders of various quantities and prices on both sides of the market, and modifying those orders to create a disproportionate quantity of contracts on one side of the market at the top levels of the order book, the CME claims that the trader induced market participants to trade into her orders (due to the resulting imbalance) for the smaller quantities she had entered, or modified, on the opposite side of the market. This pattern of order entry and modification alternated between creating buy-side pressure and sell-side pressure which induced market participants to trade into her smaller resting quantity on the opposite side of the market. Likewise, if a market participant improved the bid or offer after being misled by the market imbalance she created, she traded aggressively into the improved price.
These are useful insights into the underlying behaviours exhibited for Wash Trading which is a frequently prosecuted behaviour by regulators and exchanges alike.
Trader identification and sharing trading terminals remains a big no-no
Another rule which is regularly enforced on US exchanges is the failure to accurately identify who is executing the transaction. Traders may not share logins to their trading terminals (i.e. Rule 576 “Each Globex Terminal Operator shall be identified to the Exchange…Each individual must use a unique operator ID to access Globex.”).
The four enforcement actions during this period relate to a single firm, Grand International Futures Company Limited, who provide trading access to third parties. They were fined for failing to implement appropriate controls to ensure compliance with this rule. Specifically,
(1) failing to have appropriate policies and procedures pertaining to the creation, maintenance, and monitoring of operator IDs assigned to its customers;
(2) as a result of permitting its customers to create their own operator IDs, being unable to identify Globex Terminal Operators who used these operator IDs; and
(3) permitting multiple individuals to enter order using the same operator IDs.
Firms providing market access services to third parties (which many energy companies do) should remain aware of their obligations to properly control the identification of traders accessing the Globex platform.
Do private traders get a tougher ride than corporate traders?
It would be remiss not to highlight the fact that the vast majority of these enforcement cases targeted individual traders rather than corporate entities (or at least, no corporate entities were mentioned in the enforcement notices). If this was simply a “clean-up” exercise by the CME to remove individuals with little capacity to follow exchange rules and adhere to fundamental protocols and procedures (such as replying to an RFI), are the learnings still valid for corporate trading entities? We would argue yes, they are.
If anything, the disparity goes some way in demonstrating the value of implementing robust compliance frameworks and controls. Providing regular training to Front Office, performing automated transaction surveillance and implementing internal procedures to oversee responses to exchange inquiries are basic requirements for a successful trading business, and which sets them apart from many in the day trading community. As such, it is not surprising to see such a disproportionately skewed range of enforcement subjects.
While it is not new for exchanges to have a “flavour of the month” when it comes to enforcement, the sheer quantity of cases made public during this period by the CME should pique the interest of any compliance officer with exposure to CME NYMEX, COMEX, CBOT or the CME itself.
While the disproportionate focus is on individuals, it is still advisable that these enforcement trends are communicated to Front Office and case studies be developed from the disciplinary notices (see below). And most importantly – now would be a good time to review the effectiveness of your exchange RFI response process – especially if you are responsible for inquiries from the CME!
We have provided links to the batch of enforcement cases below should you wish to view them in detail:
- Link to Enforcement Case – 1
- Link to Enforcement Case – 2
- Link to Enforcement Case – 3
- Link to Enforcement Case – 4
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- Link to Enforcement Case – 36
- Link to Enforcement Case – 37