The CFTC has fined BBL Commodities, a US based commodity trading advisor (CTA) and commodity pool operator (CPO), USD $400,000 for the failure to maintain an adequate supervisory system to prevent potentially disruptive trading.
The Order (click here) outlines in detail the trading activities that took place on a single day (29 December 2017) and the communications between BBL and their executing brokers in the two days prior. Over a series of communications across the two days and on the day of trading, BBL instructed their executing brokers to execute a series of large transactions (one being the largest ever entered into by BBL for that product) within the settlement window for the Feb18/Dec18 ICE Gasoil futures calendar spread contract. Despite the executing broker asking whether they should start executing before the settlement window due to liquidity concerns, BBL instructed them to continue as instructed.
Despite BBL initially instructing a limit order, the supervisor adjusted this upwards off the back of the increasing market price. According to the Order, the supervisor actively monitored the market during this period and was fully aware of the disruption, including a price spike, their activity was causing. Despite this, the supervisor issued a clear “keep buying” instruction to the executing broker.
Disciplinary proceedings were initially concluded in October 2019 by ICE Futures Europe against the executing broker, Goldman Sachs, in relation to this activity (click here). In their ruling “it was determined that the timing and quantity of the orders submitted by GSA on behalf of a client were disruptive, reckless and disorderly and that failings in Goldman Sachs’s pre- and post-trade systems and controls had also occurred.”
In their findings against BBL, the CFTC quote a number of failings with regard to BBL’s control framework as the instructing party to the trades:
BBL had a Compliance Manual and Code of Conduct in place during the period of this activity;
The documents referenced training for BBL personnel on applicable laws, regulations, and rules;
However, neither the Compliance Manual nor the Code of Conduct specifically addressed potentially disruptive trading;
BBL lacked written policies or procedures for detecting or deterring disruptive trading or directing the implementation of trading strategies to avoid it;
BBL's policies and procedures didn't provide guidance to staff for assessing potential disruptive impact of orders, assessing liquidity, appropriate trading during settlement periods, or mitigating potential disruptive impact of orders;
Annual training provided by BBL did not adequately address potentially disruptive trading.
The CFTC concluded that due to inadequate supervision, BBL placed a significantly large order on 27 December 2017, and decided to increase the order size on 28 December 2017, without considering the potential disruptive impact of its trading.
This case has several elements which are worth further consideration:
The disruptive and abusive behaviour took place over a short time span and involved a single “trading incident”. There is a school of thought which suggests that regulators tend to act only when they observe a series of similar behaviours over time. This case apparently dents that hypothesis.
This is an example of “chain enforcement” – the initial investigation and fine against the executing broker acted as a trigger for this investigation. The investigation was also triggered by a non-US exchange (or a “foreign board of trade“ in official terms) – was there some element of cooperation between the jurisdictions?
The disruptive activities took place within the settlement windows of the Gasoil product in question. Effective surveillance over sensitive time windows, including settlement windows, is strongly advised.
Communications recordings played a significant role in identifying the untoward behaviour once again highlighting the increasing importance of this mode of surveillance, deployed in conjunction with orders and trades based surveillance.
The CFTC order is rich with detailed information about the specific activities as well as excerpts from the communications between BBL’s personnel and the executing brokers – a detailed read of the order is highly recommended to gain insight into what the CFTC might consider problematic.