Shining Some Light On CME's Huge "Dummy Order" Error
Submitted by a reader
The top U.S. futures regulator said on Thursday it is looking at test orders that inadvertently went live on CME Group Inc's (CME.O) electronic Globex trading platform on Monday, adding "there may be lessons" from the mistake.
Monday's mistake, which CME has attributed to human error, sent 30,000 test orders onto Globex, CME's electronic platform. The orders were placed there for 6 minutes, and wound up leaving some traders with unexpected positions. In addition, the exchange mistakenly sent out tens of thousands of messages, which typically include system updates or changes to particular markets or contracts.
Thursday's letter said that while it's not possible to cancel the trades, CME would "work with all affected customers to neutralize the financial effect of these transactions, including making customers whole for net losses they incurred in exiting positions."
Problems with this story...
1) Why would anything send out 30,000 test orders on the system simultaneously? Why would anyone couple that with an additional tens of thousands of messages? More than 30,000 orders are sent simultaneously every time the market goes through an inventory number on Wednesdays at 10:30. Just looks at that data.
2) The Oct11/Dec11 spread in both RB (gasoline) and HO (heating oil) contracted by at least $400 per contract in this 6 minute window. CL (crude oil) had significant moves by more in the longer dated part of the curve. NG (nat gas) was also effected.
3) Clearinghouses contacted customers late Monday night and asked them to verify trades that they had done against their statement. CME couldn't tell the clearinghouses what trades were put in error. CME sent out additional lists of customers that may have been affected at approx. 2am.
4) Trades went into customer accounts as positions, not necessarily as trades. Then position based algorithms went and hedged out exposure in an illiquid market. How do you determine what the net effect of the trade loss is in this case?
5) If these were test orders errantly put into the marketplace/Globex, why would they show up as positions in your trading statement but not trades on your TT machine?
6) One clearing firm alone reported over several thousand NN (nat gas swaps contracts) that hit their books near the bust range of an error trade. That would put it approx $800 per normal size contract. NN contracts for Globex on Bloomberg have this at about 300 in volume. So, if this was a real contract and it represents a real position, where is the print?
7) Investment banks and hedge funds lit up phones all over the place to figure out what was going on. Its not like no one noticed.
This thing has got to be over $30mil error. And just points out to the fact that they don't have proper risk controls. Additionally, they aren't really telling the whole story. Which is scary, because it just sounds like they are covering something up.