CME Group Issues Disciplinary Actions
Commentary by Bob Zwirb
CME Group Exchanges, including the Chicago Board of Trade ("CBOT"), announced two disciplinary actions involving wash trades and general offenses, respectively.
In the first disciplinary action, CME Group found that on six days between June 2013 and January 2014, employees of Cargill de Mexico S.A. de C.V. ("CDM") executed transactions in agricultural products on the Globex platform where there was the same beneficial ownership on both sides of the transactions. The opposing buy and sell orders were placed by CDM employees for the purpose of transferring positions from one CDM account to another. CME Group found that employees reasonably should have known that the orders would trade opposite each other. In order to settle the charges, CDM was ordered to pay a fine of $60,000.
In the second disciplinary action, the Panel of the CME Business Conduct Committee found that between June 9, 2013, and June 11, 2014, Port 22 LLC engaged in a pattern of activity in which a Port 22 automated trading system entered price modifications in Eurodollar futures spread instruments with incrementally widening spreads between the bid and offer prices. This caused aberrant bid and offer prices to be disseminated to the market. According to CME Group, Port 22 failed to adequately rectify the problem for eight months after Market Regulation first notified it of the issue, during which time several other price widening instances occurred due to insufficient monitoring measures. Port 22 was fined $55,000 to settle the charges.
See: CDM Notice of Disciplinary Action; Port 22 Notice of Disciplinary Action.
Commentary
As a policy matter, it is not really obvious why the conduct in the Cargill Order should be improper. It is fairly common and generally innocuous for large corporate entities to have reasons to transfer positions (whether in futures or in wholly unrelated assets) from one corporate subsidiary to another. Unfortunately, for the respondent, and others similarly situated, the case law on wash trading makes no exception for wash sales affected for a legitimate market purpose. As the CFTC pronounced in In re Collins, No. 77-15. (Apr., 1986): "Statutorily forbidden transactions, such as wash sales, are not made lawful when motivated by otherwise legitimate economic purpose."
In the eyes of the CFTC, all wash trades are noncompetitive. Nevertheless, perhaps the rules and legal precedent prohibiting such conduct, or requiring that the transfers take place on-exchange, should be re-examined to take into account the purpose of such trades where no injury to the market occurs.