International derivatives marketplace CME Group has posted a notice of disciplinary action against Tower Research Capital Investments LLC.
Pursuant to an offer of settlement in which Tower neither admitted nor denied the rule violations, a Panel of the Chicago Board of Trade (CBOT) Business Conduct Committee found that on October 14, 2021, a trader at Tower made a change to an automated trading system (ATS) without testing the potential impact of the change on the ATS.
This change resulted in the ATS incorrectly interpreting the risk associated with a position acquired on another market that delivered market data in notional size rather than contract size. In particular, the ATS interpreted the notional size of the position as the contract size of the position, which resulted in the ATS overestimating the value of the position. This resulted in the ATS submitting a series of fill-and-kill (FAK) orders in the December 2021 2-Year Treasury Note futures market to hedge its incorrectly calculated position.
Tower had in place a risk control that was triggered within a few milliseconds and which prevented the ATS from submitting further FAK orders. However, several of the FAK orders were still able to reach the Exchange. Each FAK order traded through multiple price levels of the order book, which lead to further price declines before the market reverted.
After considering industry best practices regarding the testing and implementation of automated trading systems, the Panel found that Tower adversely impacted the orderly conduct of trading in December 2021 2-Year futures. Additionally, the Panel determined that Tower failed to diligently supervise its ATS in the conduct of its business relating to the Exchange.
The Panel therefore concluded that Tower violated CBOT Rules 575.D. and 432.W.
In accordance with the settlement offer, the Panel ordered Tower to pay a $75,000 fine.
The effective date of the disciplinary notice is February 2, 2024.