Around 11 a.m. on Jan. 13, 2010, a computerized trading system at Chicago-based Blue Fire Capital LLC went haywire.
The high-speed trading firm mistakenly made more than 2,300 trades in two seconds on CME Group Inc.’s electronic exchange, buying and selling almost 200,000 futures contracts with itself in a “wash trade.” Such trades are prohibited because they can inflate artificially the contract’s market price, which is exactly what happened in the Blue Fire situation.
At roughly the same time, Blue Fire’s system also attempted to trade another 7.8 million contracts, but the orders exceeded a 2,000-contract limit on the CME’s electronic system and were rejected. That led Blue Fire’s automated trading system to shut down. The trades all came in the CME’s most popular electronic futures contract—the so-called S&P E-mini, which is linked to the movement of the Standard & Poor’s 500 Stock Index.
Last October—more than two-and-a-half years after the faulty trades took place—CME fined the firm $150,000. Despite the time lapse, the regulator says it polices its electronic trading arena vigilantly for such violations.
“Significant investments in our regulatory tools and technology, including staff dedicated solely to the support and continuous development of our regulatory technology infrastructure, ensure that our regulatory and market protection capabilities anticipate and evolve with the changing dynamics of the marketplace,” the company says in a statement.
According to the case file, CME concluded that while Blue Fire had tested its automated trading system before implementation, “it lacked sufficient pre-trade controls.” CME itself does not test traders’ computerized systems before they are brought online.
Andrew Karos, Blue Fire CEO and director of trading, declines to comment through a firm employee.
High-speed electronic traders account for about half the trading on futures exchanges, according to some estimates. But CME has prosecuted only a handful of similar computer malfunctions in recent years, at Infinium Capital Management LLC, Whiteside Energy L.P. and Aventis Asset Management LLC. And CME didn’t always detect the violations itself. In some cases, the trading firms themselves brought the errant trades to the attention of the exchange in the hopes of reversing the transactions.
Blue Fire was formed in 2007 to trade for its owners, rather than public customers, in a variety of assets including futures, equities and currencies. Like other “prop shops,” as proprietary trading firms are known, it invested heavily in technology to achieve ultra-rapid trading capabilities and gain a technological edge over rival traders by capturing even slim pricing discrepancies that can add up to significant profit over a high volume of trades.
But it hasn’t paid off as expected, according to sources familiar with the strategy. Around 2010, the firm had about 50 employees and visions of expanding into a larger office. But in the past couple of years it has cut its staff; former CEO Jim Kanellitsas left the firm last year.