Collective2’s statement about CME Rule 575.D

On December 23, 2019, Collective2 agreed to pay a $30,000 fine to the Chicago Mercantile Exchange (CME). Our offense was: in December 2018, too many customers traded using Collective2, and therefore the price of what they traded changed too much.

The facts of the case

Collective2 is a web site where customers verify track records of various trading strategies. If they find a strategy they like, customers can use Collective2’s software to have the strategy’s trades placed inside the customer’s personal brokerage account. (Even though trades are automated, customers control many aspects of trading. For example, they can customize how large or small to make trades, can set their own stop losses and profit targets, and can make positions bigger or smaller at will.)

On January 23, 2018, a popular strategy on Collective2 traded a futures contract on an exchange owned by CME (the “Dow E-mini” contract). When the strategy recommended that Collective2 customers sell the contract, so many customers placed trades inside their own brokerage accounts using our software that the price of the contract changed as a result.

Or, as the CME describes it: “Collective2 … trading on behalf of multiple accounts, caused significant price movements in the March 2018 E-Mini Dow futures market.”

If you read that sentence and say: “Wait a second. When lots of people want to sell something, isn’t the price supposed to change? Isn’t that what an exchange is supposed to do?” then you’re not the only one. 

We were equally surprised by the CME’s complaint.

Notice what the CME is not saying:

  • They are not saying Collective2 placed erroneous trades. 
  • They are not saying Collective2’s software malfunctioned.
  • They are not saying Collective2 (or any company employee) somehow profited from the trades.
  • They are not saying that Collective2 manipulated the market to receive an unfair price.
  • They are not saying that Collective2 “spoofed” the market (i.e. submitted orders to “fake out” other traders).

What are they saying? 

Rule 575.D, which the CME accused us of violating, states:

No person shall enter or cause to be entered an actionable or non-actionable message with intent to disrupt, or with reckless disregard for the adverse impact on, the orderly conduct of trading or the fair execution of transactions.

In the CME’s view,  our software placed trades for our customers with “reckless disregard for the adverse impact on … orderly conduct of trading.”

The CME’s position is that it is “reckless disregard” to place trades that customers want to place, as soon as customers want to place those trades, without considering that prices might change as a result, and without trying to prevent those price changes.

We respectfully disagree with this interpretation of Rule 575.D

We don’t disagree with the facts presented by the CME. Collective2’s software was designed to place trades as soon as customers wanted to place trades. We did not consider it our obligation to prevent prices from changing as a result of customer trading. Indeed, until the CME fined us, we had considered it our duty to customers to place trades quickly, with as little delay as possible. 

Collective2’s position on this matter

Collective2 respects the CME and the people that work at the firm who enforce exchange rules. However we disagree with this particular interpretation of Rule 575.D, and believe it may ultimately hurt retail traders who rely on software platforms such as Collective2 to place orders.

We do not have the resources to fight a protracted litigation, however, and therefore we agreed to settle this matter. We will respectfully comply with the CME request to change our software so that it monitors market prices and tries to prevent prices from changing too much when customers place trades.

H e l p D e s k