TIMING ERROR CODES
Bought Side-No Trade ("B-NT")
When scanning for timing errors, the computer begins by comparing the time recorded by the buyer to the time and sales listing. If no trade is indicated on time and sales at the time recorded by the buyer, the computer scans the buyer’s time. If the price as reported on the trading card is not reported as a trade during the period, the trade is error coded as B-NT.
Sold Side-No Trade ("S-NT")
The system follows the same procedure for the selling member, comparing the seller’s recorded time to the prices recorded in time and sales. If no trade is indicated on time and sales during the period, the trade is error coded as S-NT.
No Quote at This Price ("B-NT/S-NT")
The computer also combines the B-NT and S-NT searches. If neither the buyer’s nor the seller’s prices occur during the surrounding the times recorded on their trading cards, the trade is error coded B-NT/S-NT.
Time Out of Limits ("TOL")
After scanning for errors against time and sales, the computer checks the buyer’s time against the seller’s time. If both times have been marked as correct by the system but there are more than between the bought and sold side times, the trade is error coded TOL.
Bought Side-Untimed Trade ("B-UT")
If the buyer fails to record a time for a trade on his or her trading card, the trade is error coded B-UT.
Sold Side-Untimed Trade ("S-UT")
If the seller fails to record a time for a trade on his or her trading card, the trade is error coded S-UT.
The Department of Audits & Investigations consists of a Vice President-Compliance ("VP-Compliance"), a Manager-Compliance, two Investigators, and an Accountant. The VP-Compliance reports to the Senior Vice President (who reports directly to the President of the Exchange), and is responsible for the day-to-day management and supervision of the routine market surveillance, trade practice surveillance, and financial surveillance and sales practice audit programs. The current VP-Compliance has 11 years of experience.
The Manager-Compliance is responsible for various market surveillance and investigative functions, including conducting quarterly audit trail reviews, reviewing routine and special investigations, and assisting the VP-Compliance in the management of all A&I matters. The current Manager-Compliance has 8 years of experience.
The two investigators are responsible for market surveillance and the investigative functions of A&I, including floor surveillance, routine trade practice investigations, and special investigations of other possible rule violations. Each of the two investigators has more than one year of experience. The accountant has two years of experience and provides assistance in the market surveillance and investigative functions of A&I, although her primary responsibility is maintaining the financial records of the Exchange.
ERROR CODES AND PARAMETERS
The computer scans the CTI codes and reported times of executions for instances where a broker executes a trade at a better price for his or her own account than for a customer within a period. Codes "B-TA" and "S-TA" (Bought and Sold Trading Ahead) are indicated on the TAR in such instances.
The computer scans the TAR for trade groups in which the primary/opposite broker, commodity, month, and quantity all match, and where at least one "corner" is a CTI type 1 or 3, the trades do not match on price, and the trades occur within a period. In such instances, the code "ACC" is indicated.
The code "MPS" is indicated when the computer finds a trade group where all four "corners" are CTI 1 or 2, and where the trades match on commodity, month, and quantity, but not price, and occur within of each other.
The code "WSH" is indicated when the computer finds a trade group in which the primary/opposite brokers, commodity, month, quantity, and price all match, and where the trades occur within of each other.
The system scans the time that each leg of a spread is recorded, plus . If both legs appear within this three-minute window, then the trade is coded as a valid spread and the non-error code "SPD" is indicated.
Invalid Spread Trade
If both legs of a spread have been matched and identified by the computer, but no spread was reported within the time recorded by the broker, the trade is error coded "ISP".
Possible Spread Trade
If only one side of a trade recorded by a broker as a spread is cleared as such, the system identifies that trade as a possible spread, coded "pSP".
The TAR includes codes which identify trades with no CTI designation ("B-BC" and "S-BC") and prices above the daily high or below the daily low ("pAH" and "pBL"). It also has a code for invalid ring (cross) trades ("IRG"), which is indicated when a house to customer trade of the same clearing member is on both sides of the trade or if a broker’s personal account is on one side, and a code for "invalid" CTI combinations ("CTI"), which is noted when there is a CTI 2 versus 2 or 2 versus 4 trade with the same clearing member on both sides.
The system also identifies a number of non-error situations, including prices equal to the open ("OPN"), prices within the opening range ("OPR"), prices equal to the close ("CLS"), prices within the closing range ("CLR"), prices equal to the settlement price ("SET"), and ring trades ("RNG").
Broker Error Type Report
The Broker Error Type Report appears at the end of the TAR and lists for each member, by type, the number of timing errors; occurrences of errors reflecting possible trading ahead, accommodation trading, wash trading, and prices above the high or below the low; the total of all errors combined; and the percentage of timing and miscellaneous errors relative to the total number of trades executed in the pit. The report is used to gather statistics concerning the number of particular types of errors each member has on a daily basis. The total number of each type of error is recorded in a computerized log book which is maintained for all members. At the end of each month, after reviewing the TAR to eliminate those errors that were obviously not errors but aberrations, the staff manually compiles the "Time Audit Review and Statistics Report," which lists, by type, the total number of errors for each member. Generally, members with error codes of five percent or more will be investigated.
Broker Trade Quantity Summary Report
The Broker Trade Quantity Summary Report appears after the Broker Error Type Report and summarizes the trading volume for each member. The staff uses this report for statistical purposes in determining the number of days of trading activity to be reviewed in the course of a trade practice investigation.
Time and Sales Verification Against Trades Report
The Time and Sales Verification Against Trades Report indicates all unmatched quotes and all unmatched clearing house trades. The unmatched quotes are reviewed by checking them against the current market price at the time of the quote and the daily high and low to ensure that erroneous quotes are not going out. The staff refers to the TAR for possible explanations for the unmatched quotes, looking for indications of fictitious trades or quotes that may have been reported to benefit a member’s position.
The KCBT has two primary disciplinary committees, the Complaint Committee and the Business Conduct Committee ("BCC"). The Complaint Committee reviews the reports of the Exchange’s Department of Audits & Investigations ("A&I") and decides whether additional investigative work is necessary, whether a reasonable basis does or does not exist for finding a rule violation, or whether a warning letter should be issued or a notice of charges prepared and served upon the member. The Complaint Committee consists of a chairman and nine other members who trade KCBT contracts (at least two members who trade each contract). The KCBT Chairman appoints the committee members each year, with the approval of the Board of Directors ("Board"). The Exchange enforces its Rule 260.00 ("Service on Governing Boards and Committees"), which comports with Commission Regulation 1.63, by having A&I check the disciplinary backgrounds of all members appointed to the Board and disciplinary committees.
The BCC gives final approval or disapproval to all settlement offers and holds all disciplinary hearings that follow the issuance of a notice of charges. The BCC has five members: the First Vice Chairman of the Exchange, the President of the Clearing Corporation, and three elected members who serve staggered three-year terms. Appeals from BCC decisions are taken to the Board.
No person may serve on the BCC or Board who has a personal, financial, or other direct interest in the matter under consideration. Additionally, the First Vice Chairman, who sits on the BCC, may not participate in or be present at an appeals proceeding before the Board.
Upon conclusion of an investigation where A&I determines that a reasonable basis exists to believe that a member violated an Exchange rule, A&I may issue a warning letter, a copy of which is sent to the Complaint Committee. Alternatively, A&I may refer the matter to the Complaint Committee, which has ten business days to review the investigation report. The member under investigation may appear before the Complaint Committee to respond to A&I’s report. The Complaint Committee must issue its decision within ten days thereafter.
The Complaint Committee may make one of four decisions: (1) that additional investigation is necessary, and direct A&I to do it; (2) that no reasonable basis exists for finding a violation; (3) that a reasonable basis exists for finding a violation, but prosecution is not warranted; or (4) that a reasonable basis exists for finding a violation and the matter should be adjudicated. If the last option is chosen, the matter is referred to the BCC and a notice of charges, prepared by A&I, must be issued within 15 business days. The charged party may submit a written response or an offer of settlement to the Complaint Committee with ten business days of receiving the notice of charges. The Complaint Committee receives offers of settlement and, if it approves them, forwards them to the BCC for final review and approval. The BCC must consider the offer within ten business days, and then issue its written decision within 15 business days. If the settlement offer is rejected and a notice of charges has been or subsequently is issued, a hearing is scheduled before the BCC.
The Chairman of the BCC has 30 calendar days from the date of the notice of charges to set the hearing. At the hearing, the charged party has the right to be represented by counsel, call and cross-examine witnesses, and present relevant evidence. The BCC must issue a written decision within 15 business days of the conclusion of the hearing.
An appeal may be taken to the Board within ten business days of the release of the BCC’s decision. Appeals must be in writing and include the name of the charged party, the nature of the objection, and the arguments. The Board, or a panel thereof, must hear the appeal within 20 business days, and give at least ten business days advance notice of the hearing to both parties. The Board must issue a written decision within 30 calendar days of the hearing. The decision is final and effective ten business days after its delivery to the Commission.