NOTICE OF DISCIPLINARY ACTION

FILE NO.:

NYMEX 10-7565-BC

MEMBER FIRM:

INFINIUM CAPITAL MANAGEMENT

NYMEX RULE VIOLATIONS:

Rule 432.W. General Offenses – Failure to Supervise

It shall be an offense for a Member to fail to diligently supervise its employees and agents in the conduct of their business relating to the Exchange.

Rule 576. Identification of Globex Terminal Operators

Each Globex terminal operator shall be identified to the Exchange, in the manner prescribed by the Exchange, and shall be subject to Exchange rules. If user IDs are required to be registered with the Exchange, it is the duty of the clearing member to ensure that registration is current and accurate at all times. Each individual must use a unique user ID to access Globex. In no event may a person enter an order or permit the entry of an order by an individual using a user ID other than the individual’s own unique user ID.

FINDINGS:

Pursuant to an offer of settlement in which Infinium Capital Management neither admitted nor denied the rule violations upon which the penalty is based, on November 22, 2011, a Panel of the NYMEX Business Conduct Committee (“Panel”) found that on February 3, 2010, beginning at approximately 1:26:28 p.m. CST, an automated trading system (“ATS”) operated by Infinium Capital Management malfunctioned. The malfunction caused Infinium to enter 6,767 individual one-lot limit orders into the CME Globex electronic trading platform to purchase March 2010 Light Sweet Crude Oil futures (“Crude”) contracts over the course of approximately three seconds. By 1:26:52 p.m., Infinium had purchased 4,612 Crude contracts at prices ranging from 76.67 to 77.45. The remaining 2,155 one-lot orders were cancelled.

The Panel found that although Infinium had a three-phased testing protocol for new algorithms, which included a phase for trading in a simulated environment and six to eight weeks of back-testing, the algorithm at issue first traded in a live environment on February 3, 2010, with the final version having been written the previous night with only one to two hours of back-testing. Contributing to the error, Infinium’s risk systems failed to automatically shut down the algorithm after it began to malfunction. Specifically, Infinium’s system had, among others, two risk parameters designed to automatically shut down the strategy if a pre-set threshold was breached by the strategy regarding its maximum order size and/or its maximum shutdown units, which was the maximum number of contracts in a given product that a strategy could buy or sell before it was automatically shut down. The maximum order size risk parameter was not triggered due to the strategy’s placement of multiple one-lot orders. The maximum shutdown units risk parameter was not triggered because the strategy, which was designed to trade an energy-based ETF against Crude, had been incorrectly configured to trade Crude against the energy-based ETF. The maximum shutdown units risk parameters had been set to shut down the algorithm based on values for the ETF not for Crude.

The Panel further found that in offsetting a portion of the long position created from these transactions, an Infinium employee used a unique Tag 50 user ID of another Infinium employee to access Globex and enter orders.

The Panel found that in failing to adequately supervise, test, and have controls in place related to its ATS, and in its improper use of Tag 50 user IDs, Infinium violated NYMEX Rules 432.W. and 576. 

PENALTY:

In consideration of the offer of settlement, the Panel:

1. fined Infinium $350,000; and

2. ordered Infinium to cease and desist from engaging in the type of conduct described above.

In levying this penalty, the Panel considered significant steps Infinium has taken since February 2010 to enhance its quality assurance controls and risk protections. The Panel recognized that with these enhancements Infinium’s quality assurance and risk controls are consistent with the FIA Principal Traders Group’s best practices for electronic trading firms. For example, Infinium created a committee comprised of representatives from various departments within Infinium to oversee its quality assurance controls and risk management; drafted comprehensive written procedures that, among other things, govern the development, testing, and implementation of Infinium’s electronic trading systems; and developed and implemented additional electronic risk management tools to monitor automated trading strategies and prevent a similar error from occurring in the future. The Panel further considered Infinium’s enhancements to its supervisory controls over development, testing, and modifications to its electronic trading systems.

EFFECTIVE DATE:

November 25, 2011