Oil trading mayhem investigation

A
big high-frequency trading firm faces possible civil charges by regulators
after its computer ran amok and sparked a frenzied $1 surge in oil prices in
February, according to sources familiar with the continuing investigation.

Infinium
Capital Management confirmed only that it is the company at the centre of a
six-month probe by CME Group Inc into why its brand new trading programme malfunctioned
and racked up a million-dollar loss in about a second, just before markets
closed on 3 February.

The
glitch explains for the first time the lightning-quick oil-trading surge of
that day — and it may have been a catalyst for the abrupt and largely unexplained
$5 slide amid record volumes the following two days.

The
firm’s buying frenzy also reveals how faulty computer codes, known as
algorithms, can spark sharp volatility and send electronic markets spinning all
in the blink of an eye.

Futures
exchange operator CME Group is looking into the incident, which occurred at the
New York Mercantile Exchange and highlights some of the same electronic-trading
concerns raised by May’s “flash crash” in the U.S. stock market.

Exchange
compliance officials met last month with Infinium’s management, and separately
with engineers and developers who quit or were fired following the mishap,
according to two sources.

The
U.S. Commodity Futures Trading Commission is also looking at what went wrong,
said one of the sources, who were not authorized to speak to the press.

The
regulator or CME Group could charge the firm with “conduct detrimental”
to the NYMEX, or with smaller offenses, the source said. A manipulation charge
is a remote possibility, the source added.

Sweeping
financial reform that became law last month gives the CFTC far more muscle to
crack down on manipulative trading. However it is unclear whether this case
involves such trading, and unlikely that the regulator could use its new
enforcement powers retroactively.

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