RULE ENFORCEMENT REVIEW 

OF THE 

CANTOR FINANCIAL FUTURES EXCHANGE 

I. INTRODUCTION: PURPOSE AND SCOPE 

 The Division of Trading and Markets (“Division”) has completed a rule enforcement 

review of the market and trade practice surveillance, audit trail, and disciplinary programs of the 

Cantor Financial Futures Exchange (“CX” or “Exchange”) for compliance with Sections 5a(a)(8) 

and 5a(b) of the Commodity Exchange Act (“Act”) and Commission Regulation 1.51.1

 CX 

operates via a screen-based trading system. This is the Division’s first review of CX since the 

Exchange was designated by the Commission as a contract market on September 4, 1998. The 

review covers the period of September 1, 1999, through August 31, 2000 (the “target period”).2

 In conducting its review, Division staff examined Exchange documents that included, 

among others, computer reports and other documentation used in conducting market and 

 

1

 On December 22, 2000, the President signed into law the Commodity Futures Modernization Act of 2000 

(“CFMA”). The CFMA amends the Act and creates a new, flexible structure for regulation of futures trading. 

Among other things, the CFMA provides for a tiered regulatory structure that is tailored to the specific products and 

participants of a given market, taking into account the manipulability of the products and eligibility of the 

participants. Under this framework, the Division will review the regulatory compliance programs of contract 

markets for adherence to core principles rather than to prescriptive regulations. The core principles applicable to 

contract markets such as CX relate, among other things, to compliance with rules, monitoring of trading, position 

limitations or accountability, execution of transactions, recordkeeping, and protection of market participants. Since 

the target period for this rule enforcement review concluded prior to enactment of the CFMA, the Division has 

conducted this review based on the requirements of the Act and Commission regulations existing during the target 

period, rather than on the basis of the new legislation. 

2

 Rule enforcement reviews prepared by the Division are intended to present an analysis of an exchange’s 

compliance capabilities for the period under review. Such reviews focus only on programs directly addressed in the 

review and do not assess all programs. The Division’s analyses, conclusions, and recommendations are based, in 

large part, upon the Division’s evaluation of a sample of investigatory cases and other exchange documents. This 

evaluation process, in some instances, identifies specific deficiencies in particular exchange investigations or 

methods but is not designed to uncover all instances in which an exchange does not address effectively all exchange 

rule violations or other deficiencies. Neither is such a review intended to go beyond the quality of the exchange’s 

self-regulatory systems to include direct surveillance of the market, although some direct testing is performed as a 

measure of quality control. 
 2 

trade practice surveillance; trade practice investigation files; minutes of CX Board of Directors 

meetings; the operating manual for CX’s electronic trading system; and CX’s rule book. In 

addition, Division staff interviewed the CX Managing Director, and officials of the Market 

Regulation Department of the Board of Trade of the City of New York (“NYBOT”), including 

the Vice President, Market Surveillance.3

 NYBOT’s subsidiary, the New York Cotton Exchange 

(“NYCE”), is responsible for CX’s regulatory compliance operations on a contract basis. 

 The Division gave CX an opportunity to review and comment on a draft of this report on 

February 8, 2001. On March 1, 2001, Division staff conducted an exit conference with CX staff 

to discuss the report’s findings. 

II. BACKGROUND 

A. Exchange Overview 

CX was the first entirely electronic exchange designated by the Commission as a contract 

market. The Commission approved CX as a contract market for the U.S. Treasury Bond, TenYear Note, Five-Year Note, and Two-Year Note futures contracts. During its first year of 

operation, from September 1998 through August 1999, CX traded a total volume of 288,090 

contracts, for an average monthly volume of 24,008 contracts. From September 1999 through 

August 2000, the target period, CX traded a total volume of 410,632 contracts, for an average 

monthly volume of 34,219 contracts. Most of CX’s volume takes place in Ten-Year Note and 

Five-Year Note futures contracts. 

 CX is wholly-owned by the NYCE Division of NYBOT and its members through CFFE 

Regulatory Services, L.L.C., which acts as a holding company for the Exchange.4

 CX is 

 

3

 The transcript of the interview can be found in Appendix A. 

4

 NYCE holds a ten percent equity interest; its members collectively hold a ninety percent equity interest. 
 3 

operated by eSpeed Inc. (“eSpeed”), an affiliate of Cantor Fitzgerald, L.P. (“Cantor Fitzgerald”). 

However, neither Cantor Fitzgerald nor any of its subsidiaries (collectively, the “Cantor Group”) 

have any equity interest in CX. 

Under the terms of a contract between eSpeed and NYCE, all CX trades are cleared by 

NYBOT’s New York Clearing Corporation (“NYCC”). In addition, NYCE has contracted to 

provide all of CX’s regulatory services, including compliance, surveillance, arbitration, and 

disciplinary programs. 

The “eSpeed System” is the automated trading system through which all CX trades are 

processed electronically. The eSpeed System is the same system used for interdealer-broker 

trading in U.S. Treasury securities by Cantor Fitzgerald Securities (“CFS”), a Cantor Fitzgerald 

subsidiary, which is the largest-volume interdealer-broker in the U.S. Treasury securities market. 

eSpeed monitors the functioning of all components of the eSpeed System network 24 hours per 

day, seven days per week, from its operations control center in its New York office. eSpeed 

maintains more than 400 servers world-wide, and has three main data centers located in New 

York, New Jersey, and London, plus a smaller data center in Tokyo.5

 The network has triple 

redundancy, and if the primary computer system crashes, within six seconds the network can 

switch to a complete back-up computer system. 

B. Market Participants 

 Trading on CX is limited to persons or entities qualified as Authorized Traders, including 

Associate Members, Clearing Members, Screen-Based Traders, foreign Screen-Based Traders, 

 

5

 As explained below in footnote 7, CX operates a terminal operator facility in London. 
 4 

and their associated persons (collectively, “ATs”) under CX rules.6

 CX requires all non-clearing 

member ATs to be guaranteed by a clearing member of NYCC. Approximately 1,500 ATs are 

approved to trade on CX. On average, approximately 15 ATs participate in trading during a 

typical CX trading day. 

C. Order Placement 

 ATs can place orders, whether for their own or for their customers’ accounts, by two 

different methods: (1) by a telephone call to a CX terminal operator (“TO”), or (2) by direct 

electronic access. Both methods allow an AT to place orders of all common order types, 

including market, market-if-touched, limit, stop, and stop limit orders. 

At CX’s inception, ATs could place orders only by telephoning a TO located at the CX 

facility in New York City.7

 When a TO receives a telephone order from an AT, the TO promptly 

enters the trade information into the eSpeed System for matching. Under CX rules, TOs must act 

in a strictly ministerial capacity, and cannot exercise any discretion as to the handling of any 

order, maintain any kind of “order book” listing orders for later input on stated contingencies, or 

offer any trading advice to any AT.8 All TOs are employed by CFS and serve as agents of CX.9

 

6

 An AT must be a Commission registrant, a NYBOT seat holder, or an employee of a CX clearing member or 

affiliate, or, in lieu of inclusion in one of these categories, must be an Associate Member of CX. Each AT also must 

execute an agreement consenting to be subject to NYBOT regulatory jurisdiction. 

7

 On July 2, 1999, the Commission approved CX rule amendments allowing CX to operate a TO facility in London 

for processing orders transmitted by foreign members of the Exchange. TOs at this facility are subject to the same 

regulatory requirements as TOs at the Exchange’s U.S. facilities: (1) they must be both employees and agents of 

CX; (2) they must be registered with the Commission through the National Futures Association as floor brokers; and 

(3) they must sign the Exchange’s “TO Agreement” submitting themselves to NYBOT regulatory jurisdiction and 

the By-Laws and Rules of CX. London TOs also must agree to be bound by the Act and the Commission’s 

regulations; to make available to the Commission on request any information in their possession relating to futures 

trading on CX; to consent to personal jurisdiction in the U.S.; to designate the Exchange as their U.S. agent for 

service of process; and not to raise any objection to jurisdiction in any action brought by the Commission in a U.S. 

federal or state court. All orders entered through the London facility are matched on the eSpeed System hardware 

located at the Exchange’s New York facility, and are recorded in the single CX electronic trade register maintained 

there. Regulatory oversight of orders from the London facility is performed by NYBOT staff. To date, there has 

been very little trading through the London facility. 

8 See CX Rule 712(a). 
 5 

CX bars each TO from entering trades for any account in which he or she has an interest or over 

which he or she has any discretionary authority, and from having an interest in any account for 

which trades are executed at CX. 

 In March 1999, CX amended its rules to permit ATs to enter orders into the eSpeed 

System through direct electronic access terminals.10 CX refers to ATs who have electronic 

access as direct access traders (“DATs”). The distinction between a DAT and other ATs is that 

the DAT has direct electronic access. Notably, approximately 98 percent of CX orders are now 

entered into the eSpeed System by direct access, rather than through TOs. 

DATs can access the eSpeed System through a proprietary front-end application or 

through any computer program capable of communicating with the eSpeed System through an 

Application Programming Interface. DATs can communicate with the eSpeed System over the 

CX network, which gives users 300 millisecond response time from anywhere in the world, or 

over the Internet. 

To access the eSpeed System, a DAT must log in at a direct access terminal with his or 

her own user identification number and password.11 The system links each individual user 

identification number to a code known as a “page number,” which identifies the CX member 

with whom the DAT logging in is associated. The eSpeed System includes this page number in 

each entry of keystrokes made by the DAT who has logged in, and displays the page number on 

 9

 Under CX Rule 301-A(b), TOs are considered agents of CX for purposes of Section 2(a)(1)(A)(iii) of the Act. 

10 ATs eligible to trade by electronic access include: (1) CX clearing members and affiliates; (2) full NYBOT 

member firms; (3) market makers (ATs appointed by the Exchange to perform market making functions in return for 

exemption from Exchange transaction fees); and (4) Class B members of CFFE Regulatory Services (full members 

of NYCE or of the Coffee, Sugar & Cocoa Exchange, Inc. Division of NYBOT). 

11 CX Rule 301-C requires each CX member firm to designate one or more ATs employed by it as users of each 

particular direct access terminal it owns. During the login procedure, the eSpeed System verifies, by means of the 

user identification number and password entered, that the individual user logging in is authorized to use that 

particular terminal. 
 6 

the system’s Trade Server Application (“TSA”) for surveillance purposes.12 This enables 

NYBOT staff to identify the CX member owning the terminal on which each entry is made. 

TSA does not display the identity of the individual making the entry, or the identity of the 

particular terminal being used. However, eSpeed System data available to eSpeed operations 

staff can identify both the particular terminal from which any entry was made and the individual 

user logged on to that terminal when the entry was made. Each CX member is responsible for all 

entries into the system made from any of its terminals and for policing access to its own 

terminals.13

The information displayed by the eSpeed System to DATs is identical to the information 

displayed on TO terminals, except that the direct access interface does not disclose to DATs the 

identity of other market participants. All DATs receive information of uniform nature and 

quantity, although each DAT can configure his or her own trading screen to display the available 

information in customized formats. 

During the target period, and indeed since its inception, CX has had no retail customer 

business, as that term is commonly understood. The only AT which has placed an order for a 

non-proprietary account is Cantor Fitzgerald & Company (“CF&Co.”), an FCM which is a 

Cantor Group subsidiary. CF&Co. is the only entity in the Cantor Group which CX’s rules allow 

 

12 TSA capabilities are discussed below in Section V.A. 

13 CX Rule 301-C. Erroneous entries resulting in mistrades are handled under CX’s error trade policy. If an AT or 

clearing member notifies the CX Error Committee within ten minutes of a trade’s execution that the trade involves 

an error, any of the Committee’s three members can void the trade if it is priced more than five “ticks” off the 

current market price. CX maintains a telephone hot-line and paging system to enable immediate notification of the 

Error Committee in such circumstances. An Error Committee decision to void a trade must be made within 15 

minutes of receipt of notice of an error. According to NYBOT staff, error trade issues arise at CX infrequently. As 

of the end of the target period, all such issues had been resolved by agreement of the trading parties involved, 

without need for Error Committee action. Voided trades are not erased from the eSpeed System keystroke log, but 

remain in the system as “challenged” trades although they are not cleared or included in the Exchange’s volume. 
 7 

to execute non-proprietary orders on behalf of customers.14 Under the terms of the 

Commission’s designation of CX as a contract market, CF&Co., with the exception of its 

liquidity products division, is barred from executing any proprietary trades on CX, and only can 

trade on behalf of its customers.15 The only customers for whom CF&Co. has placed orders are 

ATs who have given CF&Co. authority to trade their proprietary accounts.16

CX permits DATs who are clearing members to provide their customers with the ability 

to place orders electronically through the Internet or by some other automated means. When 

such an order comes to a DAT over its electronic order routing system, the order must pass 

through a screening process that applies credit and position limits set by the clearing member for 

the account involved prior to order transmittal through the DAT’s interface to the eSpeed 

System. 

D. Trade-Matching Algorithm 

1. Price And Time Priority 

The eSpeed System’s trade matching algorithm matches eligible orders continuously 

throughout the 23-hour CX trading day, which extends from 6:30 p.m. to 5:30 p.m., New York 

time, Sunday through Friday.17 Like other automated trading systems previously approved by 

the Commission, the CX algorithm permits trading on a price and time priority basis. Unlike 

other approved systems, however, CX’s algorithm provides participants who are earliest in 

 

14 CX Rule 712(b). 

15 Proprietary trading by eSpeed’s affiliates is conducted pursuant to the procedures and criteria governing 

proprietary trading set forth in CX Rule 712, which was reviewed and approved by the Commission as set forth in a 

letter to NYBOT from the Division dated March 2, 2000. Under this approval, a separate liquidity products division 

of CF&Co. conducts proprietary trading, but does not trade on behalf of customers. 

16 These ATs could trade for themselves, but gave CF&Co. authority to trade on their behalf so that they would not 

have to monitor CX trading on a full-time basis. 
 8 

posting a best market bid or offer with certain priority rights to respond to subsequent counter 

offers or bids for limited periods of time. These “exclusive time” trading periods, described in 

more detail below, are intended to create an incentive for participants to place orders at attractive 

prices and to provide liquidity. 

An AT viewing the eSpeed System sees the best bid and best offer for each contract 

traded, plus the order queue and the AT’s own position, if any, in that queue. An AT entering 

orders by telephone contact with a TO receives from the TO the same information seen by 

DATs. Regardless of the method of access used, an AT does not know the identity of other 

market participants.18 When an AT enters a bid or an offer, whether by direct electronic access 

or by telephoning the bid or offer to a TO for entry, that bid or offer is seen simultaneously on 

the screens of all eSpeed System users. When another AT hits that bid or lifts that offer, whether 

by direct access or through a TO, the bid and offer are matched and all eSpeed System users see 

the match.19

2. Concepts Underpinning Algorithm 

 Three basic concepts underpin CX’s regular trade matching algorithm. First, at any given 

time the eSpeed System makes eligible for trading only orders that are at the best bid or best 

offer price for a specified minimum number of contracts. When the eSpeed System has multiple 

 17 The one hour in 24 during which no trading occurs is required in order to refresh the computer system. For 

settlement purposes, the CX trading day begins with the commencement of trading at 3:00:01 p.m. and ends with the 

close of trading at 3:00:00 p.m. the following business day. 

18 The eSpeed System will not accept an order for trading unless it is keypunched with complete information 

including the full terms of the order; the identification codes for the AT and, if applicable, the TO; and the account 

identifier for the customer involved. However, account identifiers for orders from other participants are not 

displayed on direct access terminals. TOs see account identifiers for the orders displayed on the TO terminals, but 

are prohibited by CX Rule 712(b) from disclosing to any AT the identity of any other market participants. Thus, all 

CX market participants remain anonymous to one another. 

19 Within one to one-and-one-half seconds following the match, the eSpeed System also transmits the trade 

electronically through the Exchange’s Trade Server Application to the Trade Input Processing System (“TIPS”) at 

NYCC for clearing. Clearing members can download TIPS clearing information regarding cleared trades every five 

minutes during the trading day, and must accept or reject each trade within 30 minutes of its posting on TIPS. 
 9 

resting orders at a particular best bid or offer price, the algorithm ranks them in the sequence in 

which they were entered, and gives first best bid or first best offer status to the first bid or offer 

entered at that price. Orders not at the current best bid or offer price are retained in the queue of 

resting orders. 

 Second, the eSpeed System does not automatically match bids and offers resting in the 

system at the same price. Instead, it executes resting orders only when a market participant 

assumes the active role of a buyer or seller by “hitting” a displayed bid or “lifting” a displayed 

offer. CX refers to buyers who assume these active roles as “aggressors.” Aggressors pay a CX 

transaction fee for executed trades, while counterparties whose resting bids or offers were hit or 

lifted do not. 

 Third, CX’s algorithm provides an “exclusive time” trading period during which two 

parties gain the right to trade exclusively with each other at the then prevailing best bid or best 

offer price. The algorithm gives this right to market participants who entered their best bids or 

best offers earliest, and aggressors who, by hitting or lifting a current best bid or offer, have 

shown a willingness to trade actively and to pay transaction fees. When an aggressor hits or lifts 

the entire stated quantity of the best resting bid or offer side of the market, the aggressor and the 

counterparty, who is the current first best bidder or first best offeror, receive an opportunity to 

sell or buy more contracts at the best bid or offer price, during a short exclusive time trading 

period. This period consists of six seconds or less during which the aggressor can offer to sell or 

buy more contracts, and six seconds or less during which the counterparty can accept this offer. 

If the offer is accepted, additional six-second periods are awarded, until one side declines further 

trades at the best bid or offer price involved.20

 

20 CX has varied the exact duration of the exclusive time period as its markets have developed. However, the 

exclusive time period has never exceeded six-second increments for each participant. While CX does not track 
 10 

During the exclusive time trading period, no other market participants can trade in the 

contract involved. However, the eSpeed System will accept bids and offers during the period at 

the same price at which the two exclusive time counterparties are trading. At the conclusion of 

the exclusive time period, any such joining bids or offers that are resting in the system are 

immediately matched with each other according to their time priority, at the same price as the 

preceding exclusive time trade. Any joining bids or offers left unmatched after this procedure 

remain in the eSpeed System and become eligible for matching. 

III. MARKET SURVEILLANCE 

A. Market Surveillance Procedures 

 Market and trade practice surveillance of CX are conducted principally by two NYBOT 

Market Regulation Department staff members: the Vice President, Market Surveillance, and a 

Compliance Investigator. The Vice President, Market Surveillance, who supervises the 

Compliance Investigator, reports to NYBOT’s Senior Vice President, Market Regulation.21

1. Price Movements And Spreads 

In order to detect potential market congestion and price distortions, NYBOT staff 

monitor price movements and spread relationships daily, by conducting real-time observation of 

trading through TSA, and by reviewing print-outs of eSpeed System data and various price 

charts.22 For all contracts traded on CX, NYBOT staff review daily and historical price changes 

dating back to the expiration of the preceding contract, as well as spread differentials between 

 

precise data on exclusive time trades, CX estimates that approximately 20 percent of CX trades executed during the 

target period were executed during an exclusive time trading period. 

21 The Vice President, Market Surveillance has more than 20 years of regulatory experience in compliance and 

market surveillance. The Compliance Investigator has more than two years of regulatory experience in compliance 

and market surveillance. 

22 NYBOT staff’s ability to monitor CX trading in real time is discussed below in Section V.A. 
 11 

the nearby month and each deferred month. NYBOT staff also track Chicago Board of Trade 

(“CBT”) price movements for Five-Year and Ten-Year U.S. Treasury Bond futures, in order to 

note any price differences with CX products. Although most differences are quickly eliminated 

by arbitrage trading and cash basis trading between the two markets, under established 

procedures NYBOT staff would review all significant price differences, particularly with respect 

to the expiring month. NYBOT staff would then determine possible causes and assess potential 

impact on CX markets. According to NYBOT staff, no significant price discrepancies occurred 

during the target period. 

2. Settlement Prices 

NYBOT staff monitor settlement prices of all contracts traded on CX each day, observing 

CX trading near the close in real time through TSA. Settlement prices are based on trades 

occurring at the close or, in the absence of such trades, on the midpoint between bids and offers 

existing at the close. Because several CX contracts are traded in higher volume on CBT, 

NYBOT staff also monitor CBT’s settlement prices, which are set a short time after the CX 

close. Arbitrage and cash basis trading usually eliminate price differences with respect to the 

same contracts between CX and CBT. When they do not, the CX Contracts Committee, which 

includes NYBOT staff and CX officials, may adjust a CX settlement price if the CBT settlement 

price indicates that a particular CX trade, bid, or offer may have unduly skewed the CX 

settlement price.23 During the target period, the committee adjusted CX settlement prices in a 

few instances because they differed by more than one tick from CBT settlement prices and were 

supported by greater volume on CBT. 

 

23 The Contracts Committee oversees CX settlement prices pursuant to CX Rule 314. None of the members of the 

committee are permitted to trade on CX. 
 12 

3. Volume And Open Interest 

 NYBOT staff also review daily CX volume and open interest data reported in the 

Exchange’s Volume and Open Interest Report. This report details daily volume by clearing 

member for each contract, as well as the volume for exchange of futures for physicals (“EFP”) 

transactions. The report also indicates gross long and short positions for all clearing members in 

all months, as well as any open position changes greater than the clearing member’s daily 

volume. NYBOT staff analyze any significant changes in open interest to determine whether the 

change could have resulted from inaccurate reporting by one or more clearing members. 

During the target period, NYBOT staff opened three investigations based on misreporting 

of open interest.24 These investigations disclosed isolated clerical errors in open interest 

reporting by three firms with no history of such violations. In each case, NYCC immediately 

sent a notice to the clearing member requesting an explanation. The clerical errors involved 

small numbers of contracts and were quickly corrected. No market harm or disruption resulted. 

NYBOT staff also monitor relevant data in order to detect potential concentrations that 

could disrupt the market. Whenever surveillance reveals sizable or unusual trades, NYBOT staff 

immediately request information on whether positions involved have risen to reportable levels. 

NYBOT staff also review daily NYCC data on clearing members’ open positions in all contracts 

for each contract month. Whenever this information warrants further inquiry, NYBOT staff 

contact relevant clearing members to obtain the identity and positions of all traders represented 

in the clearing members’ data. During the target period, a few traders had reportable positions, 

but none had positions large enough to reach speculative position limits. 

 

24 These investigations are discussed more fully below in Section V.B. 
 13 

4. Exchange Of Futures For Physicals 

During the target period, there were a total of 61 EFPs transacted on CX involving a total 

of 11,991 contracts.25 NYBOT staff routinely review each EFP. In this connection, NYBOT 

staff conduct on-screen, real-time review of the transaction information entered into the system 

when the transaction is made, which includes the identity of the account and clearing member. 

Staff also examine the futures order ticket, documentation of the cash transaction, and copies of 

the customers’ confirmation statements, which they receive a short time after the EFP is posted 

to the system. During this review, NYBOT staff verify that the transaction involves separate 

parties. 

Further investigation would be triggered if staff noted an EFP in which both sides were 

for the same account number, an unusually large EFP, an EFP priced outside the daily trading 

range, or an EFP that involved more than two parties. According to NYBOT staff, there were no 

EFPs that warranted investigation following the initial review of documents. 

B. Conclusions and Recommendations 

 The Division found that NYBOT, with respect to CX contracts, maintains an adequate 

market surveillance program. NYBOT staff monitor CX price changes, settlement prices, 

spreads, volume and open interest. NYBOT staff also conduct surveillance on a real-time, as 

well as post-trade, basis, which should provide for immediacy in recognizing market problems. 

The Division has no recommendations in this area at this time. 

 

25 An EFP is a futures and cash commodity transaction involving a transfer of ownership of the cash commodity 

between the parties, where the seller of the futures position is the buyer of the cash position and the buyer of the 

futures position is the seller of the cash position. Most of the EFPs transacted at CX during the target period were 

“basis trades” in which commercials attempt to arbitrage the cash basis, i.e., the difference between the cash and 

futures prices, on CBT and CX contracts. 
 14 

IV. Audit Trail And Recordkeeping 

A. Trade Data and Recordkeeping 

The eSpeed System automatically records both the time, to the nearest second, and the 

sequence of every keystroke entered into the system.26 This electronically-recorded data gives 

the Exchange a complete audit trail that includes all of the details of every trade. The time of 

each trade recorded by the eSpeed System is unalterable. No keystrokes can subsequently be 

erased from the eSpeed System’s keystroke record. Further, no alteration of any order or trade 

information input into the eSpeed System can be made without a complete keystroke record of 

the change, including the log-in identifier of the eSpeed System user making the alteration. CX 

maintains the entire keystroke record on read-only optical disks for a five-year period, and makes 

it available to NYBOT staff continuously on a real-time basis, as well as by review of the optical 

disks and print-outs of any requested portions.27

CX also records all telephone conversations of its TOs, including the London TO. The 

telephone recording system automatically and continuously logs the exact time in one-second 

increments during the course of all calls. CX retains the tapes of these conversations for a 

minimum of 120 days. NYBOT staff have the ability to monitor TO telephone conversations in 

 

26 The eSpeed System can distinguish fractions of a second. The keystroke log, discussed below, records keystrokes 

by hour, minute, and second, and lists all keystrokes occurring within the same second in their precise sequence of 

occurrence. The eSpeed System never records two keystrokes as simultaneous. 

27 Keystroke information is maintained in a single electronic record. This record is viewable by NYBOT staff in 

real time through the eSpeed System’s Trade Server Application. It also can be viewed through two separate logs. 

The Data Entry Transaction Log lists the exact time to the nearest second of each keystroke entered into the system, 

and thus contains full information on every bid or offer entered into the system, including trade date, commodity, 

delivery month, action (bid, hit, offer, lift, or cancel), quantity, price, clearing member, account identifier, AT 

identification code, and TO identification code (where applicable). A copy of an excerpt from the Data Entry 

Transaction Log, containing all keystroke entries for a single trading day, can be found in Appendix B. The 

Changes to Executed Transactions Log contains the record of each change made to any aspect of a completed trade. 
 15 

real time on a random basis and conduct physical observation of TOs in CX’s New York trading 

room.28 NYBOT staff also have full access to the recordings of TO telephone conversations. 

In addition to maintaining the keystroke log as a complete record of all trades, CX 

requires ATs to prepare and timestamp an order ticket for every customer order promptly upon 

receipt.29 Because CF&Co. is the only AT which has placed a customer order at CX, and the 

CF&Co. customers involved in all such orders have been other ATs, no order ticket has involved 

an order by a traditional retail customer. NYBOT staff receive CF&Co. order tickets on a biweekly basis and review all of the order tickets as they are submitted. During the target period, 

NYBOT staff found a few order tickets which were not completely clear or which lacked some 

required terms. Most of these instances involved new CF&Co. personnel. NYBOT staff 

addressed these problems through contact with CF&Co. and the CF&Co. personnel involved. 

According to NYBOT staff, all such matters were resolved satisfactorily through such contact. 

Because the eSpeed System originally was not designed for input of account identifiers, 

CX’s original rules also required TOs, then the only persons allowed to enter data into the 

eSpeed System, to record on a timestamped order sheet or “blotter” the account identifier for and 

the details of each order they entered into the eSpeed System. These blotters, which differ from 

order tickets, were reviewed by NYBOT staff. Because the eSpeed System now 

 

28 Currently, only one TO has any telephone conversations, which involve a single AT who still prefers telephone 

contact with a TO over direct electronic access. NYBOT staff monitor most of these conversations as they occur. 

During the first few months of CX’s existence, when all transactions were entered into the eSpeed System through 

TOs, greater numbers of TO telephone conversations required monitoring. At that time, NYBOT staff listened 

regularly to conversations of TOs who were receiving the greatest number of telephone calls, as well as to 

conversations of TOs chosen at random. 

29 When CX began operation, orders not immediately executable at the prevailing market price could not be entered 

into the eSpeed System. Consequently, CX rules originally provided that when a customer order not executable 

when received by an AT became executable, the AT was required to timestamp the order ticket again when 

transmitting the order to the eSpeed System. This provision was repealed as obsolete once the eSpeed System 

became capable of accepting entry of resting and contingent orders. 
 16 

accepts account identifiers, CX no longer requires TOs to fill out order sheets. However, a few 

TOs and ATs continue to use blotters in practice, because such use is common practice in the 

cash markets. 

B. Conclusions and Recommendations 

The Division found that CX satisfies the audit trail and recordkeeping requirements of the 

Act and Commission regulations. In this connection, NYBOT has adequate procedures in place 

for reviewing and enforcing compliance with the applicable CX requirements. CX itself 

maintains a complete electronic record of all details of every trade, and records all TO telephone 

conversations. CX also requires ATs to prepare and timestamp an order ticket for every 

customer order promptly upon receipt, and NYBOT staff conducts regular reviews of these order 

tickets. The Division has no recommendations in this area at this time. 

V. Trade Practice Surveillance 

A. Surveillance 

During the target period, both the NYBOT Vice President, Market Surveillance and the 

Compliance Investigator spent approximately 60 percent of their time on CX matters and 40 

percent of their time on NYBOT compliance work. Both individuals spend additional time at 

CX if market conditions so warrant. Additional NYBOT staff also will assist with CX 

surveillance when necessary. 

NYBOT staff conduct trade practice surveillance of CX from a monitoring room at CX’s 

New York facility, using TSA. As stated earlier, TSA enables NYBOT staff to conduct real-time 

observation of all CX trading activity. TSA in effect combines CX’s trade register, daily 

brokerage recap, and time and sales records. TSA also has the capacity to “scroll” backward in 
 17 

time through up to one year of trading activity.30 Because NYBOT staff review virtually all 

trading activity at CX on a real-time basis, they do not maintain surveillance logs, nor do they 

conduct programmed reviews of exception reports. Further, because CX has no retail customers, 

NYBOT staff do not maintain specific trading ahead or other dual trading investigative 

programs. 

B. Investigations 

Whenever NYBOT staff note questionable activity that suggests a possible trading abuse, 

they initiate an informal review. An informal review involves verbal contact with the ATs and 

clearing members involved in the questionable activity for information and explanations. If an 

informal review discloses that rules may have been violated, a formal investigation is initiated. 

For each formal investigation, an investigation file is opened, witnesses are interviewed, 

documents are gathered and reviewed, and an investigation memorandum is prepared. 

During the target period, NYBOT staff initiated a total of five formal investigations. All 

five investigations resulted from trade practice and market surveillance. CX received no 

customer complaints or Commission referrals during the target period. One investigation 

involved possible pre-arranged trading, one involved possible wash trading, and the remaining 

three investigations involved possible misreporting of open interest. 

At the conclusion of the target period, one open interest misreporting investigation, which 

had been open for approximately two months, had been closed.31 In three of the four 

investigations which remained open, all substantive work had been completed and the only 

remaining action needed was administrative closure of the file. These included the wash trading 

 

30 TSA can also review all CX trading data from the inception of the Exchange by searching the CD-ROM disks on 

which the required data is stored. 

31 Investigation No. 4. 
 18 

investigation, which had been open for approximately two months; the pre-arranged trading 

investigation, which had been open for approximately four months; and an open interest 

reporting investigation, which had been open for approximately 11 months.32 The third open 

interest reporting investigation, which had not yet been completed, had been open for 

approximately two months.33

 The pre-arranged trading investigation resulted from NYBOT staff observation of 

CF&Co. trading activity in the U.S. Treasury Ten-Year Note futures contract. In an instance 

when CF&Co.’s trading desk was entering equal but opposite orders on behalf of two CF&Co. 

customers, one CF&Co. broker had hit the other CF&Co. broker’s bid and sold contracts to the 

other broker without first posting the offer to the CX screen.34 Responding to a bid by hitting it 

is normal and proper on CX in most circumstances, since, as noted above, the eSpeed System 

executes trades only when one party becomes an aggressor by hitting a bid or lifting an offer. 

However, this particular trade was the first, and thus far the only, cross-trade at the Exchange, 

and the Exchange had no rules or guidelines in place addressing any required time lag between 

entering such transactions. 

The investigation report concluded that in the context of a cross trade executed by a 

single trading desk, hitting a bid without first posting the offer could be viewed as making a 

prearranged trade, and thus as conduct detrimental to the Exchange. However, the investigation 

report noted that CX had no specific rule or guideline addressing cross-trades, and that hitting a 

 

32 Investigations Nos. 5, 2, and 1, respectively. 

33 Investigation No. 3. 

34 The CF&Co. trading desk had received both (a) a customer order to buy 300 June 2000 Ten-Year Treasury Note 

Futures Contracts (the “Contracts”) on CX and sell 300 Contracts on CBT at even or better, and (b) a customer order 

to sell 250 Contracts on CX and buy 250 Contracts on CBT at even or better. After selling 250 Contracts and 

buying 250 Contracts on CBT at the same price, the CF&Co. trading desk entered a bid to buy 250 Contracts on CX 

at that price, and then hit this bid and sold 250 Contracts at the same price. 
 19 

bid was normally a proper action for an AT. The report also concluded that in this particular 

circumstance, no market harm or customer harm had resulted. NYBOT staff therefore 

recommended that the CF&Co. brokers involved not be charged, and that the Exchange amend 

its rules to address the crossing of offsetting orders handled by a single trading desk. NYBOT 

staff also recommended that a letter be issued to CF&Co. advising it that both sides of a trade 

should be posted on the eSpeed System prior to execution of a cross trade, to allow a proper 

opportunity for participation by others. CX currently is in the process of preparing the 

recommended new rule. 

The wash trading investigation involved ten instances during a two-month period when 

the CF&Co. trading desk held multiple orders from a single customer who was attempting an 

arbitrage by buying and selling the same futures on CX and CBT, respectively, and then 

liquidating the resulting position. The orders attracted NYBOT staff attention principally 

because each order ticket recorded the terms as “net scratch,” i.e., at the same price, which by 

itself could have indicated wash trades. However, the investigation concluded that the order 

terms should have been recorded as “net scratch or better” pursuant to the customer’s actual 

instructions, indicating the possibility of receiving different prices on the trades. In addition, 

copies of the orders indicated that they were entered at different times, several seconds apart. 

Finally, the investigation revealed that the customer had profited on some trades and lost on 

others, although making an overall profit. NYBOT staff therefore recommended that the 

investigation be closed. 

As stated earlier, the three open interest reporting investigations involved small-quantity, 

one-time open interest reporting errors by three different firms, none of which had a history of 

such violations. Each firm responded to a notice generated by NYCC with a written explanation 
 20 

stating that the misreporting had resulted from a clerical error. After reviewing these 

explanations, NYBOT staff recommended in each investigation that the Exchange issue a 

warning letter and close the investigation without disciplinary action. Based on the information 

in the investigative files involved, the Division believes these decisions were appropriate. 

The Division notes, however, that one of these three investigations had been open for 11 

months and remained open at the conclusion of the target period.35 The Division also notes that 

the NYBOT staff recommendation for closing this investigation with a warning letter came 

seven months after the firm involved provided its written explanation of the clerical error. It 

appears unnecessary for this investigation to have remained open for 11 months, or for it to have 

remained open for three months after the staff recommendation to close the matter. Given the 

low number of trade practice investigations opened during the target period, NYBOT staff 

should be able to review and close all investigations in a more timely manner. 

C. Conclusions and Recommendations 

The Division found that CX maintains an adequate trade practice surveillance program. 

The complete and precisely timed record of all keystrokes entered into the eSpeed System, 

coupled with NYBOT’s computer surveillance of all trading activity on a real-time basis, give 

NYBOT staff effective tools for detecting and deterring trading abuses. In general, NYBOT 

staff conducted thorough, well-documented investigations and made appropriate analyses. 

NYBOT staff completed most CX investigations in an acceptably timely manner, although it 

allowed one investigation to remain open for an apparently unnecessary length of time after all 

substantive work had been completed and only administrative closure of the file remained to be 

done. The Division has no formal recommendations in this area at this time, although it suggests 

 

35 Investigation No. 1. 
 21 

that NYBOT staff give attention to completing administrative review and closure of CX 

investigations in a timely manner once substantive work is completed.

VI. DISCIPLINARY PROGRAM 

 As part of the regulatory compliance services provided to CX by NYBOT under the 

contract for such services referred to above, CX disciplinary matters are handled by the NYBOT 

Business Conduct Committee, Supervisory Committee, and NYCE Division Board of Managers. 

During the target period, there were no CX investigations considered for disciplinary action by 

these bodies. Given that there were no matters considered, the Division is unable to evaluate the 

effectiveness of CX’s disciplinary program at this time.