Exchange operator CME Group Inc
Infinium trading programs malfunctioned on October 7 and again on October 28, 2009, causing uncontrolled selling of e-mini contracts on the Chicago Mercantile Exchange. Then on February 3, 2010, the firm lost control of an algorithm that bought oil futures in rapid succession on the New York Mercantile Exchange.
CME, which runs both exchanges, charged the firm on Friday for acts detrimental to the marketplace in the October incident, for improper identification in the February incident and for failing to supervise its activities in both cases.
Reuters reported the oil-futures algorithm malfunction and CME investigation last year. Infinium's buying on February 3 sparked a frenzied $1 surge in oil prices late that day as the computer program sent thousands of orders per second, racking up a million-dollar loss for the firm.
Infinium neither admitted not denied the rule violations, CME said in separate disciplinary notices.
High-frequency firms rely on rapid-fire trades and short-term strategies to make markets and earn the spreads on fleeting price imbalances.
Although these firms add much liquidity to securities, they have been criticized by some for destabilizing markets and the Commodity Futures Trading Commission is considering new rules that could rein them in.
Infinium, run by Chief Executive Charles Whitman, is a household name in Chicago's trading community and a member of the Futures Industry Association's Principal Traders Group, a lobby group for high-frequency traders.
CME found that Infinium errantly sold 6,958 December-dated e-mini Nasdaq 100 Index futures over seven seconds early on October 28. The firm later contacted the exchange about the problem, resulting in price changes in 763 contracts.
A similar malfunction with the same so-called automated trading system happened on October 7, although Infinium took no further action to correct, modify, or disable it before October 28, CME said.
Those two incidents resulted in a $500,000 fine.
The malfunction on the NYMEX - which involved the trading of an exchange-traded fund called United States Oil Fund and the U.S. crude benchmark future, West Texas Intermediate - resulted in a $350,000 fine.
CME said that, in that instance, Infinium used an algorithm in the open market that had been created the previous night with only one to two hours of back-testing.
Greg Eickbush, Infinium's chief operating officer, said it was likely the largest fine handed down for a nonfraudulent human error in this market.
I think that just represents the times and the current environment more than anything else, he said of the sharp scrutiny of high-frequency trading.
We didn't want to be on the precedent-setting end of any fines, however we do understand the importance of keeping the marketplace as transparent and as trustworthy as possible, Eickbush added. We haven't had a problem since, nor do we see any problems in the future.
(Reporting by Jonathan Spicer; editing by Tim Dobbyn and Andre Grenon)