• NOTICE OF DISCIPLINARY ACTION

      • #
      • CBOT 18-1003-BC
      • Effective Date
      • 29 May 2020
    • MEMBER:

      Brett Falloon

      CBOT RULE VIOLATIONS:

      Rule 575 Disruptive Practices Prohibited

      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.

      Market Regulation Advisory Notices RA1516-5 (preceding) and RA1807-5 (superseding):

      Q18: Are “flipping” orders prohibited by Rule 575?

      A18: Flipping is defined as the entry of orders or trades for the purpose of causing turns of the market and the creation of volatility and/or instability.

      A “flip” order typically has two main characteristics. First, it is an aggressor order. Second, shortly before the entry of the order, the market participant cancels an order(s) on the opposite side of the market, typically at the same price as the aggressor order. The market participant, for example, has flipped from offering to bidding at the same price. Market Regulation recognizes there are many variables that can cause a market participant to change his perspective of the market. This Rule, therefore, does not prohibit a market participant from changing his bias from short (long) to long (short).

      Flipping activity may, however, be disruptive to the marketplace. For example, repeated instances of a market participant entering flipping orders that are each large enough to turn the market (i.e., being of a sufficient quantity to sweep the entire quantity on the book at the particular price level and create a new best bid or best offer price with any remaining quantity from the aggressor flipping order) can be disruptive to the orderly conduct of trading or the fair execution of transactions. In considering whether this conduct violates Rule 575, Market Regulation would consider, among other factors:

      • the impact on other market participants;
      • price fluctuations;
      • market conditions in the impacted market(s) and related markets;
      • the participant’s activity in related markets’
      • whether the flip involved the cancellation of a large sized order(s) relative to the existing bid or offer depth; and
      • whether repeated flipping turns the market back and forth (e.g., the first flip turns the market in favor of the offer (bid) and the second flip turns the market in favor of the bid (offer)).

      Q19: Does Market Regulation consider cancelling an order via CME Group’s Self-Match Prevention functionality or other self-match prevention technology indicative of an order being in violation of Rule 575?
      A19: The means by which an order is cancelled, in and of itself, is not an indicator of whether an order violates Rule 575. The use of self-match prevention functionality in a manner that causes a disruption to the market may constitute a violation of Rule 575. Further, if the resting order that was cancelled was non-bona fide ab initio, it would be considered to have been entered in violation of Rule 575.

      FINDINGS:

      Pursuant to an offer of settlement in which Brett Falloon (“Falloon”) neither admitted nor denied the rule violations upon which the penalty is based, on May 27, 2020, a Panel of the CBOT Business Conduct Committee (“Panel”) found that between January 1, 2018 and September 30, 2018, Falloon entered orders in the Corn, Soybean and Soybean Meal, and Chicago SRW Wheat futures contracts with reckless disregard for the impact on the orderly conduct of trading or the fair execution of transactions. Specifically, Falloon entered large orders on one side of the market and then while those orders were resting, entered large aggressive orders on the other side of the market. A wash blocker caused the resting orders to be cancelled within the same millisecond or one millisecond of Falloon’s entry of the aggressive orders, which at times turned the market (“flip order”) and traded immediately. Falloon’s use of the wash blocker to flip sides of the market created order book imbalances and prevented others from gaining order book priority.

      The Panel found that as a result of the foregoing, Falloon violated Rule 575.D.

      PENALTY:

      In accordance with the settlement offer, the Panel ordered Falloon to pay a fine in the amount of $60,000 and to serve a twenty (20) business day suspension from access to any trading floor owned or controlled by CME Group and from direct and indirect access to any designated contract market, derivatives clearing organization or swap execution facility owned or controlled by CME Group.