"orderly conduct of execution" - another area of disruptive trading regulation, another CME summary action
The CME issued a summary action against an individual today for "reckless disregard for the adverse impact on the orderly conduct of trading." In this instance, the individual had "large positions" in Live Cattle and Feeder Cattle futures. He entered orders during the post settlement period that "exceeded all the quantity in five visible levels of the order book in relatively short periods of time and resulted in significant and disruptive price movements." The exchange noted that the individual should have known the orders were visible to the market and would cause the price movements observed after the orders were placed. The fine was $20 and a suspension from market access for 20 days. The order is here - https://www.cmegroup.com/notices/disciplinary/2019/05/CME-17-0755-BC-CODY-EASTERDAY.html#pageNumber=1
Please note there are a couple different things to unpack here:
first, the order indicates the trader should have known the relative size of the order versus the existing visible screen liquidity. This should mean to any trader that the exchange expects you to take into account market liquidity when determining the appropriate size of visible orders; and 'second, the issue was using a visible order book. The exchange allows block trades for a reason. A primary reason is to allow an escape valve for exactly this situation - the need, or desire, to execute a very large trade in a less liquid market. Use of a block trade allows the order to get executed in a manner that reflect but does not disrupt the market. Firms or traders that can anticipate the need to execute large orders should understand the availability of brokered or direct block trades, the reporting requirements for the different types (including method of reporting and reporting time windows), and the authorities required so as to have a pre-approved method for avoiding this situation, and
finally, firms and individuals should have a firm handle on their open positions and time period for closing these transactions and plan for closing positions in a manner that conforms to exchange rules.
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