Hard Eight Holdings LLC
CME RULE VIOLATIONS:
CME Rule 432: General Offenses (in part)
B.2. It shall be an offense to engage in conduct or proceedings inconsistent with just and equitable principles of trade.
H. It shall be an offense for any party to engage in, or attempt to engage in, the manipulation of prices of Exchange futures or options contracts; to corner or squeeze, or attempt to corner or squeeze, the underlying cash market; or to purchase or sell, or offer to purchase or sell Exchange futures or options contracts, or any underlying commodities or securities, for the purpose of upsetting the equilibrium of the market or creating a condition in which prices do not or will not reflect fair market values.
Q. It shall be an offense 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.
T. It shall be an offense to engage in dishonorable or uncommercial conduct.
W. It shall be an offense for any party to fail to diligently supervise its employees and agents in the conduct of their business relating to the Exchange.
CME Rule 433: Strict Liability for the Acts of Agents
Pursuant to Section 2(a)(1)(B) of the Commodity Exchange Act, and notwithstanding Rule 432.W., the act, omission, , or failure of any official, agent, or other Person acting for any party within the scope of his employment or office shall be deemed the act, omission or failure of the party, as well as of the official, agent or other Person who committed the Act.
CME Rule 575: Disruptive Practices Prohibited (in part)
All orders must be entered for the purpose of executing bona fide transactions. Additionally, all non-actionable messages must be entered in good faith for legitimate purposes.
B. No person shall enter or cause to be entered an actionable or non-actionable message or message with intent to mislead other participants.
D. No person shall enter or cause to be entered an actionable or non-actionable message with intent to disrupt, or with reckless disregard for the adverse impact on, the orderly conduct of trading or the fair execution of transactions.
Pursuant to an offer of settlement in which Hard Eight Holdings LLC neither admitted nor denied the rule violations upon which the penalty is based, on September 18, 2019, a Panel of the CME Business Conduct Committee (“Panel”) found that between March 14, 2014, and December 31, 2014, a partner at Hard Eight used manipulative and disruptive strategies in the E-mini S&P 500 futures market. These strategies focused on the entry or cancellation of large orders to benefit the partner’s open positions through misleading other market participants with respect to market liquidity, for the purpose and with the effect of artificially decreasing market volatility and the number of other market participants.
Specifically, the partner would, at times during the period between the closing of the cash market and the closing of the futures market, enter numerous passive orders representing a significant portion of the liquidity on both the bid and the offer. In doing so, the partner accumulated resting order quantities so large that they would have violated his clearing firm’s risk limits had they been filled, and on several occasions he acquired positions so large they did violate those risk limits. The partner entered the orders to alter the market equilibrium and mislead other market participants for his benefit. The partner also canceled large orders to create the impression of a change in buying or selling interest, knowing that other participants might trade into the same side of the market as a result of the cancellations and fill orders the partner left resting.
The Panel further found that Hard Eight lacked adequate risk and compliance controls. Despite other members of the firm knowing the partner’s trading activity and that the partner’s trading repeatedly caused the firm to post maintenance margin, the firm failed to diligently supervise the partner and allowed the violative trading to continue.
The Panel concluded that Hard Eight thereby violated CME Rules 432.W., and that pursuant to CME Rule 433, was strictly liable for the acts of its agent whose conduct violated CME Rules 432.B.2, 432.H, 432.Q, 432.T, 575.B and 575.D.
In accordance with the settlement offer, the Panel ordered Hard Eight to pay to the Exchange a fine of $800,000.