NOTICE OF DISCIPLINARY ACTION

MEMBER:

DAVID MONACO

COMEX RULE VIOLATIONS: 575.D. 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.

D. No person shall enter or cause to be entered an actionable or non-actionable message(s) 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 NOTICE (“MRAN”) RA1904-5 (IN PART)

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:

Prior to any hearing on the merits and pursuant to an offer of settlement in which David Monaco neither admitted nor denied the rule violations, factual findings, or conclusions upon which the penalty is based, on August 11, 2022, a Panel of the Commodity Exchange Business Conduct Committee (“Panel”) found that between August 1, 2019, and September 30, 2019, Monaco, in conjunction with another market participant trading for the same account, entered orders for Gold and Silver Futures calendar spreads with reckless disregard for the impact on the orderly conduct of trading or the fair execution of transactions. Specifically, on numerous occasions, Monaco and his trading partner placed orders for what amounted to large quantities on both sides of the market followed by an aggressive order (“Flipping Order”) to buy (sell) all the quantity resting at the best offer (bid). Monaco used a wash blocker to cancel the resting orders opposite the Flipping Order, typically within one millisecond, which would trade immediately and turn the market. As Monaco’s aggressive order contained sufficient quantity to fill all contracts resting at the best offer (bid), as well as leaving excess quantity resting after such fills, he created a new best bid (offer) with the remaining quantity, thus, “flipping” the market. Since Monaco’s resting and cancelled orders comprised a large percentage of the best bid or offer, his use of the wash blocker impacted other market participants’ ability to trade at any price beyond his resting orders.

The Panel concluded that Monaco thereby violated COMEX Rule 575.D.

PENALTY:

In accordance with the settlement offer, the Panel ordered Monaco to pay a fine in the amount of $50,000 and to serve a 10-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. The suspension will run from August 15, 2022, through and including August 26, 2022.