NOTICE OF DISCIPLINARY ACTION

FILE NO.:

NYMEX 11-08420-BC

NON-MEMBER:

WHITESIDE ENERGY LP

NYMEX RULE VIOLATIONS:

432. GENERAL OFFENSES

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

FINDINGS:

Pursuant to an offer of settlement in which Whiteside Energy LP (“Whiteside”) transacting business under the NYMEX Rule 559 hedge exemption and therefore subject to jurisdiction under NYMEX Rule 400, neither admitted nor denied the findings or rule violations upon which the penalty is based, on June 28, 2012, a Panel of the NYMEX Business Conduct Committee (“Panel”) found that on June 8, 2011, beginning at approximately 13:30 (CT), a trader employed by Whiteside left an automated trade execution system (“ATES”) operating unattended. The trader was responsible for turning the ATES on and off, for setting the ATES parameters and for monitoring the ATES. Whiteside had policies disallowing unattended and after hours automated trading. The ATES was not shut down and continued to operate unattended in the July 2011 Natural Gas futures contract (“NGN1”) until 7:30 (CT) on June 9, 2011.

The ATES was not designed to operate during periods of low liquidity because of the risk of financial losses to Whiteside. During a period of approximately two minutes of the total time the ATES was running unattended, the ATES entered buy orders at progressively higher prices and sell orders at progressively lower prices in a pattern that is reflected in the table, below. Although the ATES had certain automated controls that limited the size of the orders entered and positions established by the ATES, it did not have controls that would have automatically shut it down.

The table below summarizes the market activity and the activity of the Whiteside ATES during some segments of time falling between 18:00:00 and 18:59:59.999 on June 8, 2011.

As reflected by the data, the NGN1 market traded at higher highs and lower lows during the 18:40, 18:41 and 18:42 minutes, during which time the Whiteside ATES accounted for the proportion of the executed volume as reflected in the above table. The Panel found that the unintended trading of the unattended ATES contributed to the disruptive price movements in NGN1 during the period 18:41:00 (CT) to 18:42:59 (CT). During a two-second period from 18:42:38 (CT) to 18:42:39 (CT), the price of NGN1 declined approximately 34 cents from $4.85 to $4.51. The Panel also found that Whiteside did not trade in the 12 seconds leading up to the two second period, during which the volume traded was 44 contracts. Whiteside accounted for approximately 6% of the volume traded during the referenced two-second period. The Panel found that the unattended ATES modified a pending sell order and elected several resting sell stops resident in the order book on Globex. As a result, numerous other resting sell stops were subsequently triggered.

Based on the foregoing, the Panel found that Whiteside violated NYMEX Rules 432.Q. (Acts Detrimental to the Exchange) and 432.W. (Failure to Supervise). In determining the sanction to be assessed against Whiteside, the Panel considered that Whiteside lost more than $400,000 as a result of the trading that occurred while the ATES ran unattended, that it had policies disallowing after-hours automated trading as well as unmonitored automated trading, and that it has since adopted additional policies and procedures to ensure that its automated trade execution systems will not operate without appropriate monitoring. 
 

PENALTY:

In accordance with the settlement offer, the Panel ordered Whiteside to pay a fine to the Exchange in the amount of $225,000.

EFFECTIVE DATE:

July 2, 2012