CBOE Futures Exchange became the latest designated contract market to propose specific rules to ban disruptive trading practices. The exchange previously prohibited disruptive trading practices solely by copying almost verbatim the relevant provisions of federal law into one of its own rules.

CFE now proposes to continue including the federal law provisions and to additionally include other provisions that mostly copy rules of CME Group prohibiting disruptive practices. The exchange also proposes to adopt policies and procedures related to its amended rule that provide guidance. The policies and procedures mostly track the Frequently Asked Questions published by CME Group late last year related to its disruptive practices prohibition.

(Click here to access CME MRAN RA1405-5R, which includes the text of the relevant provisions of federal law, and CME Rule 575 as well as FAQs. Click here to access background on the CME Group’s rule and FAQs prohibiting disruptive practices in the article “CME Group Issues New Rule Regarding Disruptive Trading Practices” in the September 4, 2014 edition of Between Bridges.)

Generally, CFE prohibits seven trading practices some of which appear to overlap:

  • violating bids or offers;
  • demonstrating intentional or reckless disregard for the orderly execution of transactions during the closing period;
  • activity commonly known as “spoofing” (bidding or offering with the intent, prior to execution, to cancel the bid or offer);
  • entering or causing the entry of an order or quote with the intent, at the time of entry, to cancel or modify the order to avoid execution; and
  • entering or causing the entry of an actionable or non-actionable message with the intent to:
    • mislead other market participants;
    • overload, delay or disrupt exchange systems or systems of other market participants; and 
    • disrupt, or with reckless disregard for the adverse impact on, the orderly conduct of trading or the fair execution of transactions.

As at the CME Group, on CFE:

[a]ll Orders must be entered for the purpose of executing bona fide transactions. Additionally, all non-actionable messages must be entered in good faith for legitimate purposes.

Likewise, as at the CME Group, CFE provides a list of factors it may consider in assessing whether conduct violates its disruptive trading prohibitions. These include whether a trader’s intent was to “affect a price rather than to change [his/her] position,” or whether the trader’s intent was to “create misleading market conditions,” among many other considerations.

Unlike CME Group, within its disruptive trading prohibitions, CFE imposes a duty on market participants, particularly algorithmic traders, to take steps to mitigate the impact of any errors (e.g., fat finger errors); and has different language to discuss prohibited pre-open activity and the use of user-defined spreads that reflects differences between CFE and CME Group practices.

CME Group’s and CFE’s rules and guidance related to market practices are similar (but not identical) to equivalent rules and guidance of the three ICE futures exchanges: ICE Futures Canada, Europe and U.S. (Click here for background in the article “ICE Futures U.S. and Canada Amend Rules to Expressly Prohibit Disruptive Trading Practices” in the January 4, 2015 edition of Bridging the Week. Click here for additional background in the article “ICE Futures Europe to Adopt Another Variation of Disruptive Trading Practices Rule” in the January 11, 2015 edition of Bridging the Week.)

CFE self-certified its proposed amended rule (i.e., the provision is not subject to public comment) to the CFTC claiming that it was “not aware of any substantive opposing views” to its rule changes. CFE’s new amended rule regarding disruptive trading practices is intended to be effective July 30.

My View: Like CME Group and other exchanges, CFE has tried valiantly to explain what constitutes disruptive trading practices. Unfortunately, like the federal law and other exchanges’ prohibitions, CFE’s amended prohibitions and policies do not provide the industry with sufficient practical guidance to avoid running afoul of restrictions. In the end, every potential offense is subject to a post facto facts and circumstances assessment. Until regulators can provide quantitative criteria that traders can use in advance to avoid unpleasant regulatory interactions, and that firms can use to program surveillance tools to help self-detect and mitigate potentially problematic conduct, traders risk exchange, CFTC and criminal enforcement actions for engaging in conduct that – to paraphrase the federal prohibition against “spoofing” – may be, may be of the character of, or may be commonly known to the trade as, smart trading practices.