CME issues a new notice on disruptive trading FAQ, following ICE US Futures last week - very important distinctions between the two
eThe DCM blog covered the ICE US Futures update of its FAQ on disruptive trading orders last week. On Monday, the CME issued a new MRAN (Market Regulation Advisory Notice) covering many of the similar areas (the full notice is here). It covers many of the same areas.
The answer to the fifth question in the "FAQ on CME Rule 575" has been changed to reflect, as ICE US did, that companies are "expected to take reasonable steps or otherwise have controls to prevent, detect, and mitigate the occurrence of errors or system anomalies, and their impact on the market. Failure to take reasonable steps to prevent, detect, and mitigate such errors, anomalies, or impacts may violate Rules 575.C.2., 575.D., 432.W. (“Failure to Supervise”), or other Exchange rules. " This is very similar to the ICE notice and creates a residual risk around a fat finger or other incorrect order message even if the order is not considered "disruptive trading". The approach is slightly different as ICE US changed the wording to indicate an erroneous order would not normally be considered disruptive trading while CME left the language as "An unintentional, accidental, or “fat-finger” order will not constitute a violation of Rule 575" (and therefore no disruptive trading ) but left the application of other rule violations as the avenue for discipline.
The answer to the eleventh question in the FAQ again makes a divergence in the ICE US and CME answers to a very similar question. ICE US, last week, answered a question on large market orders by indicating a large order could be deemed disruptive if "if the entry disrupts the orderly conduct of trading in the markets, including, but not limited to, effecting price or volume aberrations." The CME answer speaks directly to orders placed "an order for a quantity larger than a market participant expects to trade in electronic markets subject to a pro-rata matching algorithm? ", a subtle but important distinction. The CME focuses the issue in a very different area by stating "However, it is considered an act detrimental to the welfare of the Exchange and may be a violation of other Exchange rules for a market participant to enter an order without the ability to satisfy, by any means, the financial obligations attendant to the transaction that would result from full execution of the order. Participants should be prepared to, and capable of, handling the financial obligations and risk attendant to the full execution of their orders without disrupting the market." This is the first instance that DCM has noted of an exchange indicating that submitting an order that a firm cannot satisfy its financial obligations to can fall within the disruptive trading violations.
The answer to the thirteenth question follows ICE US's new answer on "orderly execution". CME adds a sentence to the answer that "Additional factors that may be considered include, but are not limited to, the impact to other market participants’ ability to trade, engage in price discovery, or manage risk. " This differs in that ICE US pointed to "a market disruption or system anomaly" in its answer, this has been omitted in the sentence added by the CME.
The answer to the twenty third question subtly changes the FAQ answer regarding intentionally corrupted or malformed data packets. The prior answer indicated purposefully corrupting or malforming data packets has the potential to disrupt. The new answer now reads "Purposefully submitting intentionally corrupted or malformed data packets". This new answer indicates both the submission and the intent to corrupt need to be present.
There is a new example that illustrates the language in Question 23. describes a situation where an algorithm is designed to intentionally submit an incomplete data packet to negate the order being constructed. This may be considered disruptive to the Exchange systems and be a violation of Rule 575.