Blue Fire Capital LLC
CME RULE VIOLATIONS:
Rule 432. General Offenses
It shall be an offense:
Q. to commit an act which is detrimental to the interest or welfare of the Exchange or to engage in any conduct which tends to impair the dignity or good name of the Exchange;
W. for a Member to fail to diligently supervise its employees and agents in the conduct of their business relating to the Exchange.
Pursuant to an offer of settlement in which Blue Fire Capital LLC (“Blue Fire”) neither admitted nor denied the rule violations upon which the penalty is based, on October 24,
2012, a Panel of the CME Business Conduct Committee (“Panel”) found that on January
13, 2010, an automated trading system (“ATS”) Blue Fire operated malfunctioned, and rapidly entered a large number of buy and sell orders of various sizes in the March 2010
E-mini Standard and Poor’s 500 Stock Price Index Futures (“E-mini S&P”) market. Specifically, for approximately two seconds between 11:03:36 and 11:03:38 AM CT, Blue Fire’s ATS entered more than 300 buy orders totaling approximately 290,000 contracts, and nearly 300 sell orders for approximately 200,000 contracts into the CME Globex electronic trading platform (“Globex”). By virtue of these orders, the ATS executed more than 2,300 trades for approximately 200,000 contracts, with the same Blue Fire account on both sides of the trades for 94% of this volume. This level of trading caused a significant volume spike in the E-mini S&P market, which gave the impression of substantial competitive buying and selling in the open market over a two-second period.
Additionally, the Panel found that at the peak of its order activity on each side of the market, the ATS’s account had resting bids for over 93,000 contracts and resting offers for approximately 193,000 contracts. These resting orders put Blue Fire, as well as its clearing firm, at risk of a performance bond call that was equivalent to several multiples of Blue Fire’s reported assets at the time. While these resting orders were canceled before they traded, the ATS submitted another approximately 1,600 orders for more than 7.8 million contacts. However, each of these orders, as entered, individually exceeded Globex’s 2,000-contract order limit for E-mini S&P futures. Globex rejected these orders due to their size, which in turn caused the ATS to shut itself down.
Finally, the Panel found that while Blue Fire’s ATS was tested prior to deployment and was programmed with several risk controls in place, it lacked sufficient pre-trade
controls to prevent the above-described trading activity, including, but not limited to, volatility awareness, market data reasonability checks, message throttles, execution throttles, and pre-trade risk limits. Further, Blue Fire’s management at the time was unaware whether or not certain pre-trade controls were programmed into the ATS before it was deployed into a live environment.
The Panel found that by virtue of the foregoing, Blue Fire violated CME Rules 432.Q. and
In accordance with the settlement offer the Panel fined Blue Fire $150,000. In coming to accept Blue Fire’s offer of settlement, the Panel considered that Blue Fire replaced personnel and enhanced their automatic trading system risk controls since the above- described violations.
October 26, 2012
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