DCM has posted a number of disciplinary actions regarding Tag 50 - the Globex Operator ID data field on a CME message. The CME issued a Market Advisory Notice today that adds Tag 1028 - the "automated or manual indicator" to that high priority list. What is this Tag?
In the notice, the CME spells it out simply:
"Manual order entry refers to orders that are submitted to CME Globex by an individual directly entering the order into a front-end system, typically via keyboard, mouse or touch screen, and which is routed in its entirety to the match engine at the time of submission"
"Automated order entry refers to orders that are generated and/or routed without human intervention. This includes any order generated by a computer system as well as orders that are routed using functionality that manages order submission through automated means (i.e. execution algorithm)."
The industry has commonly referred to "algo trading" as something where there is a complex system developing trading orders. This Market Advisory would expand that definition of automated to, in DCM's opinion, to include a analysis system in an OMS (order management system) that, under identified conditions, enters a trade on behalf of the trader. This could also mean a spreadsheet system that has a link to drop a trade into the OMS. The advisory specifically indicates that "orders generated by automated means, including via automated spreading functionality, must be properly identified with the value “N” in Tag 1028." (the "N" tag indicates an automated order - manual orders are a "Y" value)
This begins to make sense to us here at DCM. There has been a significant number of electronic audit trail summary fines for broker/dealers failing to maintain a complete and accurate audit trail of customer orders. It is not stated that this advisory follows on that set of reviews but a major point raised in the advisory regarding proper inclusion of the Tag 1028 information:
"This has been a required data element on CME iLink interface order submissions since June 2011 and is now being added as a regulatory requirement. "
It should be noted there was a prior advisory - MRAN RA1210-5 (cited in this advisory) that indicated this was a required field but did not include the "regulatory requirement" language. That order was issued September 20, 2012.
This indicates that the CME may begin considering the failure to include or inaccurate listing of the Tag 1028 value on a Globex order in a similar manner as it considers an improper Tag 50 value or usage - which had been seen to carry high 5 digit fines and suspension of trading privileges on CME. This escalates the importance of getting Tag 1028 information correct.
DCM and firms it works with have the ability to help companies review their Tag 1028 information and their internal order generation, assess if there are gaps in their controls, and revise those controls.
Please contact us if you would like to discuss this or other regulatory issues.
The full CME advisory notice is here
The ICE US Futures issued an advisory notice on December 9 to specify " in broad terms, the key elements of a satisfactory program of supervision". While only 2 pages, there a several very important points stressed in the document:
First, ICE wants to " remind market participants that the adoption of written supervisory policies, alone, is not sufficient to discharge a firm’s supervisory duty under Rule 4.01(a)". One of the specific points they address to that is to "periodically train its employees/agents regarding Exchange Rules and Rule changes". DCM has been advising clients that a single annual training may not be considered adequate supervision, especially if it a general overview rather than addressing key changes and provisions of exchange rules. Similarly, this would suggest that exchange specific or at least exchange comparative (i.e., differences in CME, ICE US, and ICE Europe rules) training is advisable.
Second, ICE stresses size of firm and level of exchange activity are a determinant in "appropriate", They indicate "while regular manual review and monitoring of an employee’s trading activity may be perfectly sufficient for a proprietary trading firm with 5 traders, a larger proprietary firm with 50 traders may require an automated solution to effectively review and monitor employee activity." This is one of the rare times when the potential requirement of an automated system may be applied to a firm. DCM would also caution that ICE refers to "the nature and size of Exchange activity" elsewhere in the advisory without mention of number of traders. A firm with very active traders may reach the supervisory threshold for greater resources without needing to have 50 traders.
DCM has been a tad strident on the issue of failure to supervise - ICE Futures may have made our point for us.
The full two page notice is here