November 28, 2011

Highlighting broadening concerns about the reliability of trading algorithms, CME Group has fined high-frequency trading firm Infinium Capital Management a total of $850,000 for three separate computer malfunctions that shook futures markets in 2009 and 2010.

Trading programs at Infinium, one of the biggest automated trading firms in the U.S., went haywire on two separate days in October 2009, causing the uncontrolled selling of e-mini contracts on CME, the New York Times reported. A few months later, in February 2010, Infinium lost control of an algorithm that had been created the previous night with little back-testing, according to a report in the Financial Times. The algo bought oil futures in rapid succession on the CME.

The Chicago-based futures exchange operator charged Infinium for "acts detrimental" to the marketplace in the October incident and for failing to supervise its activities in both cases. Infinium neither admitted nor denied the rule violations.

From the Financial Times:

Bart Chilton, a commissioner at the Commodity Futures Trading Commission, the US futures regulator, and one of the most outspoken critics of what he calls "cheetah traders", told the Financial Times that the Infinium case highlighted the problem.

"These superfast trading systems, when they go feral, can do so in a hurry," Mr Chilton said. "They are out there trying to scoop up micro-dollars in milliseconds. I do question the value they add to markets. And get this, they aren't even required to be registered with the regulator. That needs to change."

Rogue algos that have the potential to send markets into a tail-spin have come under fire since the May 6, 2010 Flash Crash which saw markest plunge and recover within 20 minutes.

Critics claim that many algos are not properly tested before being used in the markets, and that by the time humans are able to intervene to correct a problem extensive damage can already have taken place.

In Europe, automated trading is also being scrutinized. The European Commission has proposed that firms that use trading algos would also have to provide regulators with a description of their strategies.

ABOUT THE AUTHOR
Melanie Rodier has worked as a print and broadcast journalist for over 10 years, covering business and finance, general news, and film trade news. Prior to joining Wall Street & Technology in ...