High-frequency firm fined for trading malfunctions

* Exchange CME fines Infinium $850,000 for three incidents

* Computer errors led to rapid-fire futures trades

By Jonathan Spicer

Nov 25 (Reuters) - Exchange operator CME Group Inc fined Infinium Capital Management, a U.S. high-frequency trading firm, a total of $850,000 for three separate computer malfunctions that rattled futures markets in 2009 and 2010.

Infinium trading programs malfunctioned on Oct. 7 and again on Oct. 28, 2009, causing uncontrolled selling of e-mini contracts on the Chicago Mercantile Exchange. Then on Feb. 3, 2010, the firm lost control of an algorithm that bought oil futures in rapid succession on the New York Mercantile Exchange.

CME, which runs both exchanges, charged the firm on Friday for "acts detrimental" to the marketplace in the October incident, for improper identification in the February incident, and for failing to supervise its activities in both cases.

Reuters reported the oil-futures algorithm malfunction and CME investigation last year. Infinium's buying on Feb. 3 sparked a frenzied $1 surge in oil prices late that day as the computer program sent thousands of orders per second, racking up a million-dollar loss for the firm.

Infinium neither admitted not denied the rule violations, CME said in separate disciplinary notices.

High-frequency firms rely on rapid-fire trades and short-term strategies to make markets and earn the spreads on fleeting price imbalances.

Though these firms add much liquidity to securities, they have been criticized by some for destabilizing markets, and the Commodity Futures Trading Commission is considering new rules that could rein them in.

Infinium, run by Chief Executive Charles Whitman, is a household name in Chicago's trading community and a member of the Futures Industry Association's Principal Traders Group, a lobby group for high-frequency traders. The company did not immediately return calls.

CME found that Infinium errantly sold 6,958 December-dated e-mini Nasdaq 100 Index futures over seven seconds early on Oct. 28. The firm later contacted the exchange about the problem, resulting in price changes in 763 contracts.

A similar malfunction with the same so-called automated trading system happened on Oct. 7, though Infinium "took no further action to correct, modify, or disable" it before Oct. 28, CME said.

Those two incidents resulted in a $500,000 fine.

The malfunction on the NYMEX -- which involved the trading of an exchange-traded fund called United States Oil Fund and the U.S. crude benchmark future, West Texas Intermediate -- resulted in a $350,000 fine.

CME said that, in that instance, Infinium used an algorithm in the open market that had been created the previous night with only one to two hours of back-testing.