RULE ENFORCEMENT REVIEW 

OF NYSE Liffe U.S. 

Division of Market Oversight 

April 20, 2012

 
1 

Rule Enforcement Review of 

NYSE Liffe U.S. 

I. Introduction 

The Division of Market Oversight (“Division”) has completed a rule enforcement review 

of the trade practice surveillance program of NYSE Liffe U.S.1

 (“NYSE Liffe” or “Exchange”). 

The review focused on compliance with two core principles under Section 5(d) of the 

Commodity Exchange Act (“Act” or “CEA”), as amended by the Commodity Futures 

Modernization Act of 2000, and Part 38 of the Commission’s regulations. The Division’s review 

focused on Core Principles 2 (Compliance With Rules) and 12 (Protection of Market 

Participants), which relate to an exchange’s program for enforcing its rules, conducting 

disciplinary proceedings, and protecting market participants from abusive practices.2

 The review 

covered the period from November 1, 2009 through November 1, 2010 (“target period”). 

II. Methodology 

As explained below, the National Futures Association (“NFA”) provides a number of 

regulatory services for NYSE Liffe. Accordingly, to assess the Exchange’s compliance with the 

above core principles, Division staff reviewed numerous documents created by both NYSE 

Liffe’s Compliance Department (“Compliance Department”) and NFA staff in the performance 

of the Exchange’s trade practice related self-regulatory functions. These documents included, 

among others, computer reports generated by NFA’s automated surveillance systems and other 

 

1 NYSE Liffe U.S. is the brand name of NYSE Liffe, LLC, the legal entity registered with the Commission as a 

designated contract market (“DCM”). In February of 2009, NYSE Euronext began to market its U.S. derivatives 

business under the name NYSE Liffe U.S. while the name NYSE Liffe was used to refer to its entire global 

derivatives business. NYSE Liffe, LLC, continues to be the legal entity designated as a DCM. See 

http://www.nyse.com/pdfs/03-2009.pdf. 

2 The Division’s review of NYSE Liffe was commenced prior to the effective date of the Dodd-Frank Wall Street 

Reform and Consumer Protection Act, Pub. L. 111-203, 124 Stat. 1376 (2010) (“Dodd-Frank”). Accordingly, the 

core principles cited above refer to Core Principles 2 and 12 prior to their amendment by Dodd-Frank. 
2 

reports used routinely for trade practice surveillance; trade practice investigation and inquiry 

files; meeting minutes from the Exchange’s Regulatory Oversight Committee (“ROC”); annual 

reports of the ROC;3

 investigation, inquiry, and disciplinary logs; and provisions of the 

Regulatory Services Agreement between NYSE Liffe and NFA (“RSA”) which describe the 

scope of the self-regulatory services performed by NFA. 

In addition, Division staff interviewed senior Compliance Department and NFA officials, 

including NYSE Liffe’s Chief Regulatory Officer (“CRO”) and NFA’s Senior Manager and 

Associate Director for its Trade Practice and Market Surveillance (“TPMS”) group. The 

Division also conducted a site visit of NFA’s TPMS group on May 19, 2011. During this site 

visit, Division analysts observed NFA’s automated surveillance systems and reviewed how NFA 

staff assigned to the Exchange disposed of exception reports previously generated by NFA’s 

automated surveillance system. 

The Division provided NYSE Liffe with an opportunity to review and comment on a 

draft of this report on February 10, 2012. On February 24, 2012, Division staff conducted an 

exit conference with Exchange officials to discuss the report’s findings and recommendations. 

 

 

3 The Division reviewed ROC annual reports from 2009 and 2010. 
3 

III. Summary of Findings and Recommendations 

A. Findings 

• NFA uses automated exception reports and tools to effectively identify potential trading 

violations and to conduct initial inquiries. 

• The Exchange maintains a small but highly experienced staff in its Compliance 

Department. In particular, the CRO has considerable experience with compliance 

functions, the CEA, and Commission regulations. The Division also found, however, 

that the CRO performs a number of additional duties that have the potential to distract 

him from his compliance responsibilities. 

• NFA staff members are well trained and capable. The analyst with primary responsibility 

for conducting trade practice surveillance for NYSE Liffe’s markets is highly qualified 

and has considerable experience. The number of NFA staff members assigned to 

Exchange matters was sufficient to properly conduct trade practice surveillance and trade 

practice investigations for NYSE Liffe given the Exchange’s trading volume during the 

target period. However, there has been a recent dramatic increase in trading volume on 

NYSE Liffe. 

• Inquiries, which are used to investigate unusual trading activity, are typically initiated by 

NFA. NFA may open and close inquiries without prior Exchange approval. When an 

inquiry is closed with no further action, NFA creates an inquiry report summarizing the 

facts of the inquiry. If an inquiry reveals a potential violation of Exchange rules, then the 

inquiry is designated an investigation and an investigation summary, along with all 

supporting documentation, is forwarded to the Exchange with a recommendation that the 

Exchange review the matter for possible violations of Exchange rules. 

• NFA’s inquiry reports, which summarize the facts of an inquiry if NFA staff decides to 

close an inquiry administratively, are well researched and effectively state NFA’s reasons 

for closing each inquiry. While these reports are satisfactory and the Exchange’s CRO 

was generally kept informed about the status and result of all inquiries, the Division 

found that, during the target period, the Exchange’s CRO did not review these inquiry 

reports as part of his routine monitoring of NFA’s regulatory services. 

• NFA’s inquiry reports and investigation summaries clearly state how each matter was 

initiated and how the facts were developed during the course of the inquiry or 

investigation. Requests for information from market participants were well documented 

and were incorporated into the case files in an organized manner. NFA’s investigative 

work is thorough and its documentation with respect to each matter is complete. 

• When the CRO decides not to pursue disciplinary action against the subject of an 

investigation that has been referred to him by NFA, he will include a close-out 

memorandum stating his decision in the investigatory file. During the target period, the 
4 

close-out memoranda prepared by the CRO failed to sufficiently explain the basis of his 

decisions not to take disciplinary action against the subjects of investigations. 

• NFA and NYSE Liffe maintain detailed inquiry and investigation logs. However, during 

the target period, these logs did not adequately denote the time between an exception’s 

initial identification by NFA and its official designation as an inquiry. This was 

particularly true for those inquiries that did not originate from NFA’s program of random 

review of omnibus accounts. In this report, the time between an exception’s initial 

identification and its official designation as an inquiry is referred to as the “pre-inquiry” 

stage.4

• During the target period, most inquiries conducted by NFA originated from NFA’s 

program of random review of possible wash trading through omnibus accounts. 

• The Division found that a prolonged and unexplained period of time consistently elapsed 

between the date when NFA sent an investigation report to the Exchange and the date 

when the CRO made a final determination regarding the investigation, including closing 

it with no further action or referring the matter to a disciplinary committee. 

• The Division found the NFA’s investigative work to typically be thorough and complete. 

In addition, the Division found that NYSE Liffe’s decision whether or not to pursue 

disciplinary action against a market participant was typically appropriate. 

• During the target period, the Exchange inappropriately permitted a market participant 

with significant trading volume to continue using an automated trading system whose 

trading behavior resulted in apparent violations of Exchange rules. In addition, the 

Exchange’s participation in NFA’s investigation of the matter, including efforts to 

intermediate discussions between NFA and the market participant, may have delayed 

NFA’s investigatory process. 

B. Recommendations 

Although the Division believes that NYSE Liffe maintains an adequate trade practice 

surveillance program, the Division identified areas for improvement and is making the following 

recommendations: 

• NYSE Liffe’s ROC should monitor the Compliance Department’s workload and 

responsibilities outside of compliance, including those of the CRO, to ensure that they do 

not detract from the Compliance Department’s timely and effective performance of its 

self-regulatory responsibilities, especially in light of the dramatic increase in trading 

volume at the Exchange. 

 

4 The Division notes that after the target period the CRO took additional steps to track matters in this “pre-inquiry” 

stage. 
5 

• NFA and NYSE Liffe should undertake a comprehensive review of NFA staff and other 

resources devoted to trade practice surveillance at the Exchange to determine whether 

such resources are sufficient for the Exchange’s current volume levels. At the conclusion 

of such review, NFA and NYSE Liffe should report to the Division concerning the 

review process, the factors considered, the conclusions reached, the reasons why they 

believe that NFA’s present staff levels are adequate or need improvement, and any 

actions taken or planned in response to the review. 

• NYSE Liffe’s CRO should receive and promptly review reports of all inquiries closed by 

NFA to monitor the sufficiency of NFA’s inquiry process and the adequacy of NFA’s 

substantive determinations.5

• NYSE Liffe close-out memoranda for any investigation referred by NFA and closed 

administratively by the Compliance Department should provide additional information 

sufficient to explain any final action taken with respect to the investigation (i.e., action 

other than referral to any disciplinary committee or remittal to NFA for further work). 

• All logs maintained by NFA should note the date of the initial trade exception or other 

activity that led to an inquiry or an investigation. 

• NFA should periodically provide NYSE Liffe with a log of all matters in the pre-inquiry 

stage. 

• NFA should increase the number of proactive reviews it conducts with respect to NYSE 

Liffe markets.

• NYSE Liffe should reduce the time it takes to review and take action with respect to 

completed investigations referred by NFA. 

• NYSE Liffe should require market participants whose automated trading systems or 

algorithms result in trading patterns that are indicative of apparent violations of Exchange 

rules to discontinue the use of such systems or algorithms until the cause of the apparent 

violations is identified and remedied. 

• NYSE Liffe should ensure that its participation in NFA’s investigations of potential 

Exchange rule violations, including any intermediation of discussions between NFA and 

Exchange market participants, does not delay NFA’s investigatory process. 

 

 

5

 During his interview with the Division, the CRO noted that he planned to begin reviewing reports of all inquiries 

closed by NFA. 
6 

IV. NYSE Liffe Operations 

A. Designation as a Contract Market

 On March 14, 2008, NYSE Euronext, Inc. (“NYSE Euronext”), an operator of equity and 

derivatives exchanges in both Europe and the United States, purchased from Chicago Mercantile 

Exchange Group, Inc. (“CME”) a group of precious metals contracts that were traded on the 

Board of Trade of the City of Chicago, Inc. (“CBOT”).6 Under the terms of the agreement 

between the two companies, these contracts were to continue trading on CBOT until NYSE 

Euronext established its own DCM. From June 3, 2008 to August 15, 2008, NYSE Liffe 

submitted documents to the Commission as part of an application for designation as a DCM. On 

August 21, 2008, the Commission approved NYSE Liffe’s designation application and also 

approved the transfer of the metals contracts purchased from CME, along with all open interest 

associated with these contracts.7 

On September 8, 2008, NYSE Liffe completed its first day of trading.8 Clearing services 

were provided by CME, which had cleared trades for the precious metals contracts when they 

were traded on CBOT.9 In March 2009, the Exchange transitioned to the Option Clearing 

Corporation (“OCC”) for clearing services.10 In the period from September 2009 to November 

 

6 NYSE Liffe Overview, NYSE Liffe application for designation as a contract market: 

http://www.cftc.gov/stellent/groups/public/@requestsandactions/documents/ifdocs/nyseliffeoverview.pdf. 

7 Order of Designation of NYSE Liffe, LLC: 

http://www.cftc.gov/ucm/groups/public/@newsroom/documents/file/nyseliffeletter082108.pdf. 

8

 On September 8, 2008, NYSE Liffe had the following contracts listed for trading: 100oz. Gold futures, 100oz. 

Gold futures options, Mini-sized Gold futures, 5000oz. Silver futures, 5000oz. Silver futures options and Mini-sized 

Silver futures. See http://www.nyse.com/pdfs/1-2008.pdf. 

9 NYSE Liffe Overview supra note 6. 

10 The transition to OCC for clearing services was effective March 30, 2009: http://www.nyse.com/pdfs/04-

2009.pdf. 
7 

2010, NYSE Liffe listed for trading a number of MSCI equity index futures products.11 OCC 

was also selected as clearing service provider for these contracts. OCC continues to perform 

clearing services for both the MSCI equity index contracts and NYSE Liffe’s metals contracts. 

 NYSE Liffe uses NYSE Euronext LIFFE CONNECT® (“LIFFE CONNECT”) as its 

trading platform, which is provided and maintained by NYSE Technologies, a division of NYSE 

Euronext. Exchange trading privileges are open to members and non-member market 

participants; however, non-member market participants are required to access the market through 

a member. Members must complete an application process that requires the applicant to meet 

certain minimum financial requirements and undergo a background check.12 Members are 

entitled to discounted rates on Exchange fees. 

B. Products and Trading Volume During the Target Period and After 

 During the target period, five products comprised approximately 97.45 percent of NYSE 

Liffe’s volume: Mini-sized Gold futures accounted for 53.05 percent; Mini-sized Silver futures 

21.64 percent; 100oz. Gold futures 14.64 percent; MSCI EAFE Mini futures 4.78 percent; and 

MSCI Emerging Markets Mini futures 3.33 percent. Figure 1, below, depicts the Exchange’s 

trading volume by contract during the target period.13 

 

11 Futures on the MSCI Emerging Markets, MSCI EAFE, and MSCI USA Indices were listed for trading on 

September 8, 2009: http://www.nyse.com/pdfs/19-2009.pdf; futures on the MSCI USA Growth and Value Indices 

were listed for trading on July 6, 2010: http://www.nyse.com/pdfs/08-2010.pdf, futures on the MSCI Europe, MSCI 

Europe Value, MSCI Europe Growth, MSCI Euro and MSCI Pan-Euro Indices were listed for trading on November 

1, 2010: http://www.nyse.com/pdfs/24-2010.pdf, http://www.nyse.com/pdfs/23-2010.pdf. Effective June 20, 2011, 

NYSE Liffe become the sole DCM listing futures on the MSCI Emerging Markets and MSCI EAFE Indexes: 

http://www.nyse.com/pdfs/15-2011.pdf. 

12 NYSE Liffe U.S. Membership: 

http://www.nyseliffeus.com/sites/liffeus.nyx.com/files/nyseliffeusmembershipapp.pdf. Financial Requirements for 

membership are explained in Rules 504 and 505 of the NYSE Liffe Rulebook: 

http://www.nyse.com/pdfs/rulebook.pdf. 

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agreements that are cleared by DTCC’s subsidiary, Fixed Income Clearing Corporation.16 The 

Exchange believes that this cross-margining, which New York Portfolio Clearing refers to as 

“one-pot” margining, allows market participants to more efficiently manage their capital and 

market risk. 

From the time of its launch on September 8, 2008 until March of 2011, NYSE Liffe’s 

aggregate trading volume remained relatively stable. Monthly trading volume averaged 354,474 

contracts during the target period (including both options and futures volume). NYSE Liffe was 

the ninth largest U.S. futures exchange, by volume, in 2010. However, because U.S. futures 

volume is highly concentrated at the largest exchanges, NYSE Liffe accounted for only .15 

percent of total U.S. futures trading volume in 2010. 

As depicted in Figure 2 below, trading volume at the Exchange increased significantly 

beginning in March of 2011.17 Most recently, trading volume during the month of February 

2012 reached almost two million contracts. This large increase in volume was primarily driven 

by Eurodollar and U.S. Treasury futures products listed by the Exchange in late March 2011, 

catapulting NYSE Liffe to the fifth largest U.S. futures exchange by volume in 2011. However, 

even with this increase, the Exchange’s volume only accounted for approximately .68 percent of 

U.S. futures trading volume in 2011. 

 

16 New York Portfolio Clearing – About NYPC: http://www.nypclear.com/about. 

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13 

guidance on DCM board composition (i.e., at least thirty-five percent public directors).22 

Currently, the Board consists of nineteen directors, with seven who qualify as public directors 

(approximately 37 percent of the total number of directors). 

2. Regulatory Oversight Committee

NYSE Liffe’s self-regulatory program is overseen by the Exchange’s ROC, which is a 

committee of the Board made up of three of the Exchange’s seven public directors. ROC 

members are appointed by the Board and, as public directors, may only be removed by a 

majority vote of the Board. The members of the ROC do not have a fixed term and serve until 

their successor is appointed, they resign, or they are removed. The ROC’s duties are to: “(i) 

provide independent oversight of core regulatory functions, including trade practice, market and 

financial surveillance, (ii) assist the Board in minimizing potential conflicts of interests of NYSE 

Liffe with the goal that the core regulatory functions enable the Board to administer effectively 

NYSE Liffe’s self-regulatory obligations, and (iii) ensure that core regulatory functions are fair 

and impartial to all NYSE Liffe members.”23 As part of these duties, the ROC must annually 

prepare a report that evaluates the effectiveness of the Exchange’s self-regulatory program. In 

furtherance of these duties, the ROC has considerable authority to review Exchange 

 

22 The Acceptable Practices for Core Principle 15 of the CEA state that “[a]t least thirty-five percent of the directors 

on a contract market’s board of directors shall be public directors.” 

23 NYSE Liffe ROC Charter. The ROC charter also includes a more detailed list of responsibilities, which states 

that the ROC shall: (1) “monitor NYSE Liffe’s regulatory program for sufficiency, effectiveness and independence”; 

(2) “oversee all facets of the regulatory program as performed by [NFA]”; (3) “review the size and allocation of 

regulatory budgets and resources; and the number, hiring, termination and compensation of NYSE Liffe’s regulatory 

officers and staff”; (4) “identify aspects of the regulatory scheme that work well and those that need improvement, 

and, as necessary, make recommendations to the Board for changes that would ensure fair and effective regulation”; 

(5) “supervise NYSE Liffe’s chief regulatory officer, who will report directly to the Committee”; (6) “keep minutes 

and records of its meetings, deliberations and analyses, including records of all decisions made by the [ROC] and 

any disagreements within the [ROC] with respect to such decisions”; (7) “review such other matters and perform 

such additional activities, within the scope of its responsibilities, as the Board deems necessary or appropriate”; and 

(8) “review changes (or proposed changes, as appropriate) to NYSE Liffe’s rules to the extent that such rules are 

likely to impact significantly the self-regulatory functions of NYSE Liffe.” 
14 

documentation and independently consult with, and interview, staff of NYSE Liffe and NFA, the 

Exchange’s regulatory service provider. Additionally, the ROC also has the authority to retain 

independent legal counsel and other professional services.24 

 The CRO meets with the ROC at least four times a year to give the committee a formal 

presentation about the status of the compliance function. These presentations summarize the 

activities performed for the Exchange by NFA and highlight the status of any pending inquiries, 

investigations and disciplinary proceedings. The ROC also plays an integral part in setting the 

budget for the Compliance Department. The CRO makes an annual budget recommendation to 

the ROC. The ROC reviews the CRO’s budget recommendations and makes a recommendation 

to the full board. The Compliance Department’s budget is approved by the Board as part of the 

Exchange’s overall budget. 

D. Regulatory Services Provided by NFA 

 As mentioned above, NYSE Liffe has contracted with NFA to receive certain regulatory 

services. In particular, NFA performs trade practice and market surveillance on NYSE Liffe’s 

markets, as well as most of the investigatory work relating to trade practice and market 

surveillance. NFA also conducts background checks on potential members in connection with 

the processing of new membership applications. Additionally, NFA provides an arbitration 

forum for the resolution of customer vs. NYSE Liffe member disputes and NYSE Liffe member 

vs. member disputes. Real-time monitoring of trading on the Exchange’s markets is not 

 

24 Id. The ROC Charter states that the ROC has the authority to “(i) conduct its own inquiries; (ii) consult directly 

with regulatory staff of NYSE Liffe and the National Futures Association; (iii) interview employees, officers and 

members of NYSE Liffe; (iv) review all relevant documents; (v) retain independent legal counsel, auditors and other 

professional services; and (vi) otherwise exercise its independent analysis and judgment to fulfill its regulatory 

obligations.” 
15 

performed by NFA, but is instead conducted by employees of NYSE Liffe Administration and 

Management.25

 During the target period, NFA provided similar services to ELX Futures, CBOE Futures 

Exchange, Chicago Climate Futures Exchange, and NASDAQ OMX Futures Exchange. Among 

exchanges utilizing NFA for regulatory services in 2010, NYSE Liffe was the third largest 

exchange by volume, trading approximately four million futures contracts. As noted previously, 

however, NYSE Liffe’s trading volume increased dramatically in 2011. As depicted in Figure 5 

below, in 2011 the Exchange became the largest exchange, by volume, receiving regulatory 

services from NFA.26 

 

25 Further information on real-time market monitoring by NYSE Liffe can be found on pages 18-19. 

26 On December 31, 2010, the Chicago Climate Futures Exchange transitioned to IntercontinentalExchange for 

regulatory services. Therefore, its trading volume for 2011 was not included in figure 5. In 2011, NFA also began 

providing regulatory services for Eris Exchange. Since Eris Exchange was designated as a DCM on October 28, 

2011, its trading volume was also not included in figure 5. Data in figure 5 for ELX, CBOE Futures Exchange, 

NYSE Liffe, and Chicago Climate Futures Exchange were obtained from Futures Industry Association monthly 

volume and open interest reports. Data in figure 5 for NASDAQ OMX were obtained from Commission trading 

volume statistics. 
 

Contract

Volume

0

5,000,000

10,000,000

15,000,000

20,000,000

25,000,000

Figure 

Exc

t

ELX

5: 2010 a

changes Us

CBOE

Futures

Exchange

N

and 2011 F

sing NFA 

16 

YSE Liffe

U.S.

Ch

Cl

Fu

Exc

Futures Tr

for Regul

hicago

imate

utures

change

NAS

OMX

rading Vo

latory Serv

SDAQ

(NFX)

olume of 

vices

2010

Futures

Contract

Volume

2011

Futures

Contract

Volume
17 

V. Trade Practice Surveillance Program

Core Principle 2 – Compliance with Rules: 

The board of trade shall monitor and enforce compliance with the rules of the contract 

market, including the terms and conditions of any contracts to be traded and any 

limitations on access to the contract market. 

Core Principle 12 – Protection of Market Participants: 

The board of trade shall establish and enforce rules to protect market participants from 

abusive practices committed by any party acting as an agent for the participants. 

Pursuant to Appendix B to Part 38 of the Commission’s regulations, a contract market’s 

trade practice surveillance program should have the arrangements, resources, and authority 

necessary to perform effective rule enforcement. The arrangements and resources attendant to 

the program should facilitate the direct supervision of the contract market, including analysis of 

relevant data. Trade practice surveillance programs can be carried out by the contract market 

itself or through delegation to a third party. 

 An acceptable program should have systems that maintain all data reflecting the details of 

each transaction executed on the contract market. In this regard, the program should include 

routine electronic analysis of transaction data to detect potential trading violations. The program 

should also provide for appropriate and thorough investigation of potential trading violations 

brought to the contract market’s attention, including member and Commission referrals and 

customer complaints. 

A. Compliance Staff 

1. Exchange Compliance Department Staff 

During the target period, NYSE Liffe’s Compliance Department consisted of two 

dedicated staff members, the CRO and a consultant who spent approximately two-thirds of his 

time working on Exchange functions and a third of his time performing services for New York 
18 

Portfolio Clearing, a DCO affiliated with the Exchange. After the target period, the consultant 

was appointed Deputy CRO. The Compliance Department also includes an analyst that spends 

half of his time with the Compliance Department. The CRO and the Deputy CRO are both 

attorneys with many years of experience in compliance and with the CEA and Commission 

regulations. The CRO’s responsibilities include overseeing the Exchange’s compliance program 

and managing NFA as a provider of regulatory services. In addition to his compliance duties, the 

CRO provides advice to the Exchange relating to the CEA, Commission regulations, and other 

applicable laws and regulations. He also prepares new contract and rule filings for submission to 

the Commission and occasionally assists with legal work in other areas. The Deputy CRO 

assists the CRO with these duties. 

The Exchange does not have a general counsel, but receives legal services from NYSE 

Euronext’s legal department. The CRO reports to the ROC, but for administrative matters the 

CRO is overseen by the CEO of NYSE Regulation, Inc., a not-for-profit organization that 

performs market regulatory functions for NYSE Euronext’s national securities exchanges.27 The 

CRO’s compensation and employment tenure are determined by the ROC. 

London-based staff of Liffe Administration and Management conducts NYSE Liffe’s 

real-time market monitoring. This London staff consists of approximately twenty-five people 

that cycle between NYSE Liffe and other exchanges operated by NYSE Euronext. Each Liffe 

Administration and Management staff member that conducts real-time market monitoring for the 

Exchange has signed a secondment agreement in which they agree to work under the control and 

direction of the Exchange’s CRO or its Chief Operating Officer when conducting NYSE Liffe 

real-time market monitoring. While these personnel report to the Exchange’s CRO or Chief 

 

27 NYSE Euronext’s national securities exchanges include New York Stock Exchange LLC, NYSE Amex LLC, and 

NYSE Arca, Inc. 
19 

Operating Officer when performing this real-time market monitoring function, they remain Liffe 

Administration and Management employees. 

2. NFA Compliance Staff and Coordination with NYSE Liffe 

NFA is managed on a day-to-day basis by a twelve-member Executive Committee 

comprised of the NFA’s President and eleven members of NFA’s Board. NFA trade practice 

surveillance is handled by the Trade Practice and Market Surveillance Group.28 TPMS has a 

vertical structure: analysts and senior analysts are overseen by a manager, who is overseen by a 

senior manager. TPMS is headed by an Associate Director. 

During the target period there was a pool of five analysts and senior analysts to oversee 

the exchanges for which NFA conducted trade practice surveillance, including NYSE Liffe. 

Although NFA does not have a formal compliance manual to detail the procedures NFA staff 

must follow while conducting trade practice surveillance, the Division found that NFA’s staff 

members are highly qualified and well trained.29 Each new TPMS employee receives four to 

eight weeks of training. This training includes, among other things, a review of NFA’s 

regulatory service agreements with exchanges, a review of NFA’s trade practice exception 

reports, a review of NFA’s internal procedures, a review of specific contract specifications, and 

familiarization with exchange rules.30 New staff will also spend time observing an analyst or 

senior analyst during performance of trade practice and market surveillance analysis. 

 

28 After the target period TPMS was renamed Market Regulation. 

29 While NFA does not have a single comprehensive document that could be considered a compliance manual, it has 

a number of documents that, taken together, detail the procedures that NFA staff must follow while conducting trade 

practice surveillance. The Division believes that these documents should be compiled into a formal compliance 

manual. 

30 NFA’s automated surveillance system generates trade practice exception reports when trading behavior exhibits 

suspicious patterns or breaches pre-programmed parameters. These exceptions identify potential violative conduct 

and alert NFA staff to matters that require further review. Further information on automated surveillance by NFA 

can be found on pages 21-23. 
20 

Additionally, NFA cross-trains analysts so they are familiar with the rules of each exchange for 

which NFA provides regulatory services. 

Each exchange for which NFA conducts trade practice surveillance is assigned a primary 

analyst. While each primary analyst typically conducts trade practice and market surveillance 

for the exchange they are assigned, on any given day any one of the other analysts, senior 

analysts, or managers could be called upon to conduct trade practice and market surveillance. 

The primary analyst assigned to NYSE Liffe is highly qualified and has considerable experience. 

Typically, the primary NYSE Liffe analyst spends approximately eight to eight and a half hours 

per day reviewing exceptions and doing casework for NYSE Liffe. Time spent by the rest of the 

TPMS group on NYSE Liffe matters varies. On a typical day, a manager will review the 

primary NYSE Liffe analyst’s work as will a senior manager. Other analysts may assist with 

investigations and perform daily surveillance if the primary NYSE Liffe analyst is out of the 

office or has other work to complete. 

NFA and its staff interact regularly with the Exchange’s Compliance Department to keep 

it informed of any issues related to the regulatory services provided. Each month NFA sends 

NYSE Liffe two reports. One report includes all exceptions by type. The second report is a log 

which includes current formal inquiries and investigations that are open on behalf of NYSE 

Liffe. NFA also conducts formal meetings with NYSE Liffe once a month to discuss any new 

market makers, changes to existing incentive programs, new incentive programs, outstanding 

inquiries/investigations, the monthly reports submitted to the Exchange, new Exchange business 

(e.g., product launches), compliance issues raised by either party, as well as any other items of 

note. NFA and the Exchange’s Compliance Department staff are also regularly in contact 
21 

several times each week, either via email or phone, and if required, daily. Additionally, the CRO 

is included in all emails in which NFA requests information from a market participant. 

Recommendations with Respect to Compliance Staff

NYSE Liffe maintains a small but highly experienced staff in its Compliance Department. 

However, all staff members have meaningful responsibilities outside of the Compliance 

Department. The Exchange experienced significant volume growth in 2011. This growth, 

combined with the Compliance Department’s small size and outside responsibilities, raises 

concerns about the sufficiency of Compliance Department resources at NYSE Liffe. The 

Division believes that the Compliance Department could become overburdened, especially if the 

Exchange continues its current rate of growth. Accordingly, the Division recommends that: 

• NYSE Liffe’s ROC monitor the Compliance Department’s workload and 

responsibilities outside of compliance, including those of the CRO, to ensure that 

they do not detract from the Compliance Department’s timely and effective 

performance of its self-regulatory responsibilities, especially in light of the 

dramatic increase in trading volume at the Exchange.

The Division believes that the number of NFA staff assigned to NYSE Liffe was sufficient 

during the target period. However, given the Exchange’s increasing volume, the Division is 

concerned about NFA’s continued ability to conduct effective trade practice surveillance for 

NYSE Liffe with a single primary analyst. Accordingly, the Division recommends that: 

• NFA and NYSE Liffe undertake a comprehensive review of NFA staff and other 

resources devoted to trade practice surveillance at the Exchange to determine 

whether such resources are sufficient for the Exchange’s current volume levels. 

At the conclusion of such review, NFA and NYSE Liffe should report to the 

Division concerning the review process, the factors considered, the conclusions 

reached, the reasons why they believe that NFA’s present staff levels are 

adequate or need improvement, and any actions taken or planned in response to 

the review. 

B. Automated Surveillance System

 NFA’s primary trade practice surveillance tool is an alert and analysis program called the 

Trade Analysis and Profiling System (“TAPS”). TAPS was developed internally by NFA and 

features a variety of flexible analysis tools within one integrated system. TAPS generates trade 

practice exception reports when trading behavior exhibits suspicious patterns or breaches pre-
22 

programmed parameters. These exceptions identify potential violative conduct and alert NFA 

staff to matters that require further review. TAPS functions with order and trade data provided 

daily to NFA by the Exchange, typically no later than four hours after the end of a trading 

session. 

The exception reports generated by TAPS are catalogued according to the violations they 

are designed to detect. Common reports include, for example, the Simple Wash Trade Report, 

the Direct Cross Report, the Money Pass Report, and the Counter Party Trade Percentage Report. 

Through such reports and others, TAPS can detect wash trading, direct and indirect crossing of 

orders, and other possible violations of Exchange rules. The TAPS exception reports are 

generated and reviewed daily, typically on the business day after the trade occurred (T+1). NFA 

staff’s review of exceptions is aided by a suite of TAPS tools that permit detailed analysis of 

trades, traders, trading patterns, and relationships. In addition to automated exception reporting, 

NFA also uses TAPS to conduct customized “pro-active” reviews of audit trail data. For 

example, staff has the flexibility to tailor queries based on the time of a transaction, order type, 

quantity, price, etc. Once NFA staff move beyond their initial review of an exception to a more 

detailed examination of potential trading abuses, this ability to organize and mine trade data 

greatly facilitates staff’s research and analysis. 

Another important TAPS function is the “trader profile,” which provides NFA with the 

key characteristic practices of specific traders. Trader profiles include average number of trading 

days per month, frequency of trading, average trade size, profit and loss history, frequent 

counterparties, and percentage of total volume in a given market. These trader profiles allow 

NFA to notice deviations from a trader’s profile, such as those involving unusual profit patterns, 
23 

significant trading volume changes, unusual concentrations of trading activity between the same 

counterparties, and unusual error account activity. 

TAPS also includes a “notes” function that allows NFA staff and supervisors to 

document and track their surveillance work. The notes function also enables the NFA staff that 

reviews exception reports to dismiss trade exceptions administratively. In such instances, the 

notes function provides the place for electronic documentation to record an administrative 

closure if staff deems an exception not to be indicative of a trading violation. Notes can be 

reviewed by NFA supervisors and other staff members who need to consult them for their 

reviews. 

Division staff reviewed TAPS’ tools and output in the course of this review, and has 

reviewed TAPS in the course of previous rule enforcement reviews and applications for 

designation by other exchanges using NFA for regulatory services. The Division believes that 

TAPS is sufficient to assist NFA staff to monitor trading on the Exchange, examine potential 

violations, and track and supervise compliance work as it progresses. Accordingly, the Division 

has no recommendations in this area.

C. Trade Practice Inquiry and Investigation Process

1. NFA’s Review of Trading Activity 

NFA staff reviews TAPS exception reports daily. NFA staff can dismiss an exception 

immediately, with appropriate electronic documentation through TAPS’ notes function, if it 

deems the exception unfounded. Some exceptions require further information before a decision 

is made either to close that exception administratively or to open it as an inquiry. If NFA staff 

believes that further information is required, the exception will remain open while information is 

solicited or further monitoring is performed. During this time, NFA staff uses the TAPS notes 
24 

function to document the information they have gathered to establish a possible pattern of 

violative trading. While not formally designated by NFA or the Exchange, this open period may 

be referred to as a “pre-inquiry” stage. The notes created during this pre-inquiry stage are visible 

to all NFA staff and managers so a staff member monitoring an exception in the pre-inquiry 

stage can be advised if any other NFA staff observe a related trade exception. The additional 

monitoring in the pre-inquiry stage will provide information to confirm whether or not the initial 

exception was isolated in nature and unintentional or whether a formal “inquiry” should be 

opened. Many exceptions in the pre-inquiry stage are eventually closed without being raised to 

the status of a full inquiry. 

If NFA determines that an exception requires further scrutiny, it will then initiate an 

inquiry. NFA may open inquiries, and close them administratively, without prior Exchange 

approval. Inquiries may also be initiated by means other than through exception reports. NFA 

periodically conducts "pro-active" reviews to detect potentially abusive trading activity. These 

pro-active reviews include an analysis of a trader's entire audit trail of activity, as opposed to just 

the activity surrounding a specific trade exception. 

If an inquiry reveals potential violations of Exchange rules, then a formal “investigation” 

may be opened. Under the RSA, if NFA believes that an inquiry should become a formal 

investigation, NFA staff will contact the CRO to explain the results of its inquiry and make a 

recommendation to open an investigation. The CRO will then make a determination as to 

whether further investigation is necessary. If the CRO declines to follow NFA’s 

recommendation, the RSA requires that he notify NFA in writing and provide an explanation for 

the decision. 
25 

In practice, the transition from inquiry to investigation appears to be less formal than 

described in the RSA. In instances where the facts and evidence do not support opening an 

investigation, NFA will close the inquiry administratively with no action. If NFA believes that 

there may be a potential violation of Exchange rules, the inquiry will be designated as an 

investigation and will be referred to the Exchange for review along with an investigative 

summary and the supporting documentation that forms the basis of NFA’s findings. Typically, 

NFA refers investigations to the Exchange the same day they are formally designated as 

investigations. 

One of the characteristics that distinguishes matters designated by NFA as inquiries from 

matters designated as investigations is that NFA may close inquiries administratively without 

Exchange approval. If an inquiry does not develop into an investigation and is closed 

administratively by NFA with no action, an inquiry report is created that details NFA’s review of 

the relevant facts. In contrast, all matters designated as investigations are referred to the CRO 

along with an investigative summary and a recommendation that the Exchange review the matter 

for possible violation of Exchange rules. 

During the target period, the CRO did not receive a copy of NFA’s inquiry reports. 

Instead, the Exchange was informed through email or over the phone that an inquiry was closed 

and received a brief description as to why it was closed. Division staff reviewed all ten inquiry 

reports created by NFA during the target period that explain NFA staff’s decision to close an 

inquiry administratively with no further action. While the Division believes that these reports 

are satisfactory, the Division is concerned that the CRO did not review them. 

 
26 

2. Exchange Review of NFA Investigations 

At the conclusion of an investigation NFA prepares a written report summarizing its 

findings and presents this report to NYSE Liffe’s CRO along with the supporting documentation 

that forms the basis of NFA’s findings. Once the investigative summary is received by the CRO, 

he will make the final decision as to what action, if any, will be taken. The CRO may forward 

the report to an NYSE Liffe disciplinary committee, close an investigation without referral to a 

disciplinary committee, or remit the matter back to NFA for further investigation. If the CRO 

decides to close an investigation without referral to a disciplinary committee, the CRO will draft 

a memorandum explaining his decision. These close-out memoranda typically contain a brief 

description of why the Exchange chose to close the relevant investigation, such as insufficient 

evidence or lack of jurisdiction. 

During the target period, the Exchange closed six trade practice investigations that had 

been referred to it by NFA with a recommendation for review for possible violations of 

Exchange rules. Of these, two investigations were closed by the Compliance Department with 

no action and four were closed by the Exchange through the issuance of a warning letter to the 

investigated party. Division staff reviewed the investigation files for all six investigations closed 

during the target period. Division staff also reviewed both close-out memoranda drafted by the 

CRO during the target period. 

In general, the Division believes that the explanations provided in the CRO’s close-out 

memoranda do not fully explain the CRO’s reasoning for his final determination. For example, 

in one instance during the target period, the CRO closed an investigation due to a lack of 

evidence. The close-out memorandum for this investigation consisted of two sentences. One of 

these sentences simply stated that the CRO was closing the matter without further action. The 
27 

other, in explaining the decision, stated that “[t]he basis for this determination, among other 

things, is the lack of evidence of one of [sic] more violations of NYSE Liffe US Rules subject to 

the Exchange’s jurisdiction, and considering the evidence in the best light possible from the 

aspect of a prosecution for violation of Exchange’s rules, the de minimis nature of the activity.” 

The Division believes that limited explanations such as these are not sufficient. If there was a 

lack of evidence, the CRO should have explained in his closing memoranda why the evidence 

presented was insufficient to prove a violation of the rules cited by NFA in its investigation 

report. In instances where the CRO believes that the Exchange does not have jurisdiction over 

the market participant, the CRO should set forth the reasons why the Exchange does not have 

jurisdiction. 

Recommendations with Respect to Inquiry and Investigation Process

The Division is concerned that, during the target period, the Exchange’s CRO did not review 

inquiry reports detailing NFA’s review of inquiries that did not develop into investigations. The 

Division believes that the CRO cannot effectively evaluate whether or not NFA staff is correct 

in its decisions to close matters administratively if he does not review the final report of 

inquiries that do not become investigations. Accordingly, the Division recommends that: 

• NYSE Liffe’s CRO receive and promptly review reports of all inquiries closed 

by NFA to monitor the sufficiency of NFA’s inquiry process and the adequacy of 

NFA’s substantive determinations.

The Division is also concerned that during the target period the CRO’s close-out memorandum 

provided only a limited explanation of his reasoning for his final determination to close an 

investigation with no action. Accordingly, the Division recommends that:

• NYSE Liffe close-out memoranda for any investigation referred by NFA and 

closed administratively by the Compliance Department provide additional 

information sufficient to explain any final action taken with respect to the 

investigation (i.e., action other than referral to any disciplinary committee or 

remittal to NFA for further work).
28 

D. Inquiry and Investigation Logs

 NFA maintains a log detailing all inquiries and investigations at NYSE Liffe, including 

all inquiries not closed or escalated to an investigation. This log is sent monthly to the Exchange 

and allows it to determine whether inquiries are resolved in a timely manner. However, in a 

number of inquiries, Division staff noticed prolonged periods between the dates when NFA staff 

were first alerted to potentially violative activity, and the dates NFA formally opened an inquiry. 

These periods correspond to the periods in which each matter was in the pre-inquiry stage, as 

described above. Since the time spent in the pre-inquiry stage varies with each inquiry and 

investigation, and is not accounted for in NFA’s log, the log does not fully reflect the time that 

NFA spent investigating a matter. As a consequence, it may be difficult for the CRO or 

Division staff to evaluate the timeliness of an inquiry or investigation conducted by NFA. 

In discussions with Division staff, the CRO has noted that he is taking steps to enhance 

his understanding and use of NFA’s log. In particular, the CRO is taking additional steps to 

track any outstanding exceptions identified by NFA that have not been closed administratively 

by NFA or that have not become inquiries within thirty days after generation. The Division 

supports the efforts of the CRO in this regard and believes that a proper accounting of this preinquiry stage is necessary for the Exchange to effectively oversee the regulatory services 

provided by NFA. 

Recommendations with Respect to Inquiry and Investigation Logs

The Division recommends that: 

• All logs maintained by NFA note the date of the initial trade exception or other 

activity that led to an inquiry or an investigation.
29 

• NFA periodically provide NYSE Liffe with a log of all matters in the pre-inquiry 

stage.

E. Number and Source of Inquiries and Investigations Closed During the Target Period

1. Inquiries Closed by NFA During the Target Period 

NFA closed 11 inquiries during the target period. Nine of these 11 inquiries were also 

opened during the target period and two were opened prior to the target period. Ten of the 

closed inquiries were closed with no action and one was closed through elevation to an 

investigation. For the ten inquiries closed with no action, NFA created inquiry reports with a 

review of the relevant facts. For the inquiry closed through elevation to an investigation, NFA 

created an investigative summary that included a review of the relevant facts as well as a 

recommendation that the Exchange review the matter for possible violation of Exchange rules. 

Division staff reviewed the inquiry reports of the ten inquiries closed with no action and 

the investigation summary of the inquiry closed through elevation to an investigation. Most of 

the 11 inquiries were generated from NFA’s exception report process. Of the 11 inquiries, one 

was generated from the review of a Direct-Cross exception, one was generated from the review 

of a Firm Versus Firm exception, and eight originated from NFA’s random review process for 

omnibus accounts that were identified in Simple Wash exception reports.31 The last of the 11 

inquiries was generated from a pro-active review of trader activity. As described above, in these 

pro-active reviews, NFA staff conduct customized queries of audit trail data to detect activity 

that potentially violates Exchange rules. 

 

31 In its random review process for omnibus accounts, NFA identifies Simple Wash exceptions generated from its 

automated surveillance system that involve omnibus accounts. At the end of each month, to determine whether 

parties to trades identified in the Simple Wash exception reports are actually two separate accounts, NFA randomly 

selects a number of these exceptions for review to determine who has ownership and control of the underlying 

accounts connected to the omnibus account. These random reviews constitute the principal means by which NFA 

conducts trade practice surveillance of omnibus accounts’ compliance with Exchange rules.
30 

2. Investigations Closed by the Exchange During the Target Period 

During the target period, the Exchange closed six trade practice investigations that had 

been referred to it by NFA. These six investigations involved the investigation of eight separate 

parties.32 One of the investigations closed was the investigation that NFA had elevated from an 

inquiry during the target period. The other five investigations were referred by NFA prior to the 

target period. Of the six investigations closed by the Exchange during the target period, two 

were closed by the Compliance Department with no action and four were closed through the 

issuance of a warning letter. In one of the investigations closed with no action, the Exchange 

determined that it did not have jurisdiction over the investigated party and referred the 

investigated party to the Commission and other regulators for further action. In the other, the 

Exchange closed the matter with no action due, in part, to a lack of evidence. 

Recommendation with Respect to Number of Inquiries and Investigations 

Division staff is concerned that NFA conducts very few inquiries that originate from sources 

other than NFA’s program of random review of omnibus accounts. In particular, the Division is 

concerned about the low number of pro-active inquiries. As mentioned above, NFA closed only 

one pro-active inquiry during the target period. Pro-active reviews are potentially an effective 

tool for identifying trading practices that violate Exchange rules and Division staff believes that 

NFA should utilize this tool more often. Accordingly, the Division recommends that:

• NFA increase the number of pro-active reviews it conducts with respect to NYSE 

Liffe markets. 

F. Timeliness of Inquiries and Investigations 

NFA opened thirteen trade practice inquiries during the target period. While only nine of 

the inquiries opened during the target period were closed by the end of the target period, none of 

 

32 One of the parties appeared in three separate investigations. 
31 

the inquiries that were still open at the end of the target period were open for longer than a 

year.33 In addition to the nine inquires opened and closed during the target period, NFA also 

closed two additional inquiries during the target period that were opened prior to the target 

period. All eleven inquiries closed by NFA during the target period, either with no action or 

through elevation to investigation, were closed by NFA within a year from the time they were 

initiated. 

As mentioned above, the Exchange closed six investigations during the target period. 

One of the investigations closed was the investigation that NFA referred to the Exchange during 

the target period. The other five investigations were referred by NFA to the Exchange prior to 

the target period. Of the six investigations closed by the Exchange during the target period, five 

were closed within six months to a year of when NFA initially opened an inquiry and one was 

closed over fourteen months after NFA initially opened the inquiry. Division staff examined the 

investigation files for all six investigations closed by the Exchange during the target period to 

determine whether they were closed within a reasonable amount of time. Division staff noted a 

prolonged and unexplained period of time that consistently elapsed between the date when NFA 

sent the written report explaining the findings of an investigation to the Exchange and the date 

when the CRO closed the investigation. 

In five of the six investigations, including an investigation open for over fourteen months, 

more than six months elapsed from the time when the Exchange received the written 

investigative summary from NFA to the date when the CRO either closed the investigation with 

no action or issued a warning letter. The Division analyzed the investigations for mitigating 

 

33 The four remaining inquiries initiated during the target period were still in the inquiry stage at the end of the 

target period and had not been elevated to investigations. As mentioned above, typically NFA will officially 

designate an inquiry as an investigation the same day it refers the matter to the Exchange with a recommendation 

that the Exchange review the matter for possible violation of Exchange rules. 
32 

factors, including the complexity of the investigation, the number of firms or individuals 

involved as potential wrongdoers, the number of potential violations to be investigated, and the 

volume of documents to be examined by the Compliance Department. Based on these factors, 

the Division believes that these five investigations did not warrant six or more months to resolve 

from the time they were received by the CRO. 

Recommendation with Respect to Timeliness of Inquiries and Investigations 

The Division recommends that: 

• NYSE Liffe reduce the time it takes to review and take action with respect to 

completed investigations referred by NFA.

G. Adequacy of Inquiries and Investigations

1. Inquiry and Investigatory Work by NFA 

Division staff reviewed the inquiry and investigation files, including the inquiry reports 

and investigative summaries, of all inquiries and investigations closed by NFA during the target 

period. The Division typically found the quality and documentation of investigative work to be 

thorough and complete. Questions posed by NFA staff were clear, highly informed, and tightly 

focused on soliciting information to determine compliance with Exchange rules. Division staff 

consistently found that NFA staff reviewed documents carefully and used those documents with 

skill when conducting investigations, writing inquiry reports and investigation summaries, and 

determining whether or not violations had occurred. 

Division staff also observed that pre-inquiries, inquiries, and investigations were well 

documented. NFA’s work product clearly demonstrates NFA staff’s analysis and conclusions. 

Inquiry reports and investigation summaries clearly state how each matter was initiated, how the 
33 

facts were developed during the course of the inquiry/investigation, and clearly summarized 

interviews. Division staff also found that requests for information from market participants were 

documented and incorporated into the inquiry and investigation files in an organized manner. 

2. Review of Investigations by NYSE Liffe 

Division staff also reviewed the investigation files of all investigations closed by the 

Exchange during the target period. In five of the six investigations, the Division found that the 

Exchange’s actions, and its decisions whether or not to pursue disciplinary action, were 

appropriate. However, the Division believes that the Exchange’s actions in one investigation 

(“Automated Trading Investigation”) may have delayed NFA’s investigatory process. The 

Division also believes that the Exchange’s response to the actions under investigation was 

insufficient to ensure immediate compliance with Exchange rules. 

As discussed further below, the Automated Trading Investigation involved a market 

participant that utilized an automated trading system while receiving payments from NYSE Liffe 

under a trading incentive program based on the volume it transacted on NYSE Liffe. The 

investigation concerned the significant number of trades the market participant executed against 

itself. In the period from January 8, 2009 to February 25, 2009, after the Exchange had already 

been alerted by NFA regarding the large number of trades that the market participant was 

executing against itself, the market participant executed 16,401 trades with itself for a total of 

16,653 contracts. In the thirty-three trade dates in this period, there were twenty-one days where 

the volume of the market participant’s trades with itself was 6 percent or more of NYSE Liffe’s 

total trading volume. 

In December of 2008, NFA discovered that this market participant was executing a large 

number of trades against itself. NFA staff contacted the market participant to investigate the 
34 

matter. In its initial response to NFA, the market participant identified the issue as a 

combination of its trading practices and its trading systems’ interaction with NYSE Liffe’s 

trading engine that it claimed resulted in inadvertent trades against itself. 

In January of 2009, NFA met with the CRO and discussed this issue. The CRO noted 

that, in February of 2009, NYSE Liffe had plans to implement a newer version of its LIFFE 

CONNECT Trading Platform. This newer version was being implemented, in part, to help with 

the issue the market participant identified in its initial response to NFA. The CRO requested that 

NFA continue to monitor the market participant with the expectation that the activity would 

decrease after the implementation of the new version of the trading platform. The Exchange did 

not require any immediate changes in the market participant’s trading practices to address its 

potentially violative trading activity. Further, NYSE Liffe did not exclude the trades the market 

participant executed against itself from the volume numbers used to determine the market 

participant’s payments under the incentive program.34 

In February of 2009, shortly before the implementation of the new version of the trading 

platform, NFA asked the Exchange to submit a number of additional questions to the market 

participant. NFA chose to communicate through the Exchange rather than directly contact the 

market participant, because during this period of time the Exchange was in direct contact with 

the market participant and the Exchange appears to have viewed the issue as primarily a 

technology problem. 

In February of 2009, the Exchange implemented the new version of its trading platform. 

While the number of wash or self-trades executed by the market participant decreased, the 

 

34 In September of 2009, NYSE Liffe began to exclude trades against oneself from the volume numbers used to 

determine payments under this incentive program. 
35 

market participant continued to execute a significant number of trades against itself. 

Additionally, NFA did not receive a response to its February 2009 questions until May of 2009, 

approximately three months after they had first submitted the questions to the Exchange and five 

months after NFA first detected the trading activity under investigation.35 During this time 

period, NYSE Liffe was in regular contact with the market participant as the Exchange and 

market participant attempted to resolve the matter as a technology issue. 

In September 2009, although the issue had not been resolved, NFA decided to close its 

investigation and refer it to the Exchange for review for potential violations relating to Exchange 

rules 410 (Good Faith Bids and Offers) and 607 (Cooperation in Investigations and Proceedings). 

In November 2009, NYSE Liffe issued a warning letter to the market participant for the apparent 

violation of Exchange rule 602 (Fictitious Transactions). The warning letter stated that the 

reason for the self-trading was that the logic of the market participant’s order-routing gateway 

allowed its orders to pass to the Exchange’s Trading Platform and execute against its own resting 

orders resulting in the market participant trading against itself.36 As a consideration for not 

referring the matter to an Exchange review panel, the warning letter cited the lack of any 

evidence that the trading activity was done for any improper purpose and the highly technical 

nature of the issue. 

 

35 The Division was unable to ascertain when the Exchange actually passed NFA’s questions along to the market 

participant. 

36 The Warning Letter issued to the market participant stated that NYSE Liffe concluded the self-trades were the 

result of the following: “When [the market participant’s] aggressing algorithm generates an order and sends it to 

[the market participant’s] order-routing gateway that could execute against an order resting on the NYSE Liffe US 

Trading Platform placed by [the market participant’s trading] algorithm, the order-routing gateway will hold the 

aggressing order, at least initially, while it attempts to cancel the resting...order by order ID. The order ID is 

assigned by the NYSE Liffe US Trading Platform. In cases where the order ID has not yet been received back from 

the Trading Platform, [the market participant’s] order-routing gateway only holds the aggressing order for a limited 

period, and will send the aggressing order without first sending a message to cancel the resting...order. [The market 

participant’s] order-routing gateway, therefore, is programmed to release the aggressing order without necessarily 

sending a message cancelling the potentially offsetting...order.” 
36 

The Division is concerned about the manner in which the Exchange dealt with this 

matter. Specifically, after the Exchange recognized that the market participant was conducting a 

significant number of trades against itself, and during the entire length of the investigation, the 

Exchange permitted the market participant to continue using the trading system that was 

resulting in this trading activity. Equally troubling, the market participant’s trades against itself 

were included in the trading volume statistics used to determine the market participant’s 

payments under the Exchange’s incentive program. The Division believes that the market 

participant should not have been permitted to continue using the trading system at issue nor 

should it have continued to receive its volume based incentive payments. 

The Division notes that, unlike in other investigations it reviewed, in this matter NYSE 

Liffe was an active participant in the investigation. The Exchange’s role included acting as an 

intermediary between NFA and the market participant, even before NFA completed its 

investigation report. While the Division believes that NYSE Liffe has a responsibility to oversee 

NFA’s regulatory work and that this can include working in tandem on an investigation, any 

such work should be carefully coordinated and should not delay NFA’s investigatory process. 

Recommendations with Respect to Adequacy of Inquiries and Investigations 

The Division believes that NFA and NYSE Liffe’s inquiry and investigation processes are 

typically adequate. Most inquiries and investigations are thorough and complete. However, the 

Division believes that the proper response to situations in which automated trading systems are 

apparently violating Exchange rules, even inadvertently, is for the Exchange to discontinue such 

systems’ access to the Exchange until the cause of the apparent violation is identified and 

remedied. Accordingly, the Division recommends that:

• NYSE Liffe require market participants whose automated trading systems or 

algorithms result in trading patterns that are indicative of apparent violations of 

Exchange rules to discontinue the use of such systems or algorithms until the 

cause of the apparent violations is identified and remedied. 
37 

Additionally, the Division also believes that NYSE Liffe should ensure that, in the future, its 

participation in any investigation does not hinder NFA’s investigatory process. Accordingly,

the Division recommends that:

• NYSE Liffe ensure that its participation in NFA’s investigations of potential 

Exchange rule violations, including any intermediation of discussions between 

NFA and Exchange market participants, does not delay NFA’s investigatory 

process.