ON FEBRUARY 3RD 2010, at 1.26.28 pm, an automated trading system operated by a high-frequency trader (HFT) called Infinium Capital Management malfunctioned. Over the next three seconds it entered 6,767 individual orders to buy light sweet crude oil futures on the New York Mercantile Exchange (NYMEX), which is run by the Chicago Mercantile Exchange (CME). Enough of those orders were filled to send the market jolting upwards.
A NYMEX business-conduct panel investigated what happened that day. In November 2011 it published a list of Infinium’s alleged risk-management failures and fined the firm $350,000. Infinium itself neither admits nor denies any violation of the exchange’s rules. It takes the same line on a $500,000 fine it was given at the same time for alleged transgressions on the CME itself in 2009.
Those alleged failures pull back the curtain on some of the safeguards that are meant to protect traders, exchanges and markets from erratic ultra-fast algorithms. The NYMEX panel found that Infinium had finished writing the algorithm only the day before it introduced it to the market, and had tested it for only a couple of hours in a simulated trading environment to see how it would perform. The firm’s normal testing processes take six to eight weeks. When the algorithm started its frenetic buying spree, the measures designed to shut it down automatically did not work. One was supposed to turn the system off if a maximum order size was breached, but because the machine was placing lots of small orders rather than a single big one the shut-down was not triggered. The other measure was meant to prevent Infinium from selling or buying more than a certain number of contracts, but because of an error in the way the rogue algorithm had been written, this, too, failed to spot a problem. To complete the catalogue of errors, the firm then allegedly breached another CME rule when an employee used a colleague’s trading ID to put on positions that would offset its unwanted exposures.