CME Group issued a new Market Regulation Advisory Notice regarding the placement of orders during the CME Globex pre-open, as well as an amendment to an existing MRAN clarifying the required time for reporting of exchange for related position transactions and the obligations of clearing members for EFRPs by their customers. Both MRANs are scheduled to be effective November 2.
Under its new MRAN, CME Group advised traders that no market on open orders may be placed on Globex. Alternatively, traders may place orders prior to the Globex open with a specific price, or by giving a broker or other party who may handle customer orders complete discretion over price and time of execution. Such an order – known as a DRT (disregard the tape) order – would give the order executor full discretion to execute all, some or none of the order.
The CME Group cautioned that persons placing orders during the Globex pre-open materially above or below the indicated opening price might be deemed to engage in a disruptive trading practice, as such order might cause “aberrant price movement” during the relevant time period.
In the amended MRAN, CME Group indicated that, absent “mitigating circumstances,” all EFRP transactions must be submitted to the exchange for reporting as soon as possible but by no later than end of the business day that the EFRP was executed. Moreover, clearing members would no longer have to apply “due diligence” to determine if a customer’s EFRP was legitimate. However, a clearing member would be expected to take “appropriate action” if it had actual or constructive knowledge that an EFRP was non-bona fide.
Compliance Weeds: Although much attention has been focused on the CFTC’s and exchanges’ prohibition against placing an order without the intent at the time of order placement for the order to be executed (e.g., “spoofing”), market participants must be equally cognizant of exchanges’ prohibition against persons entering or causing the entry of order messages with the intent to disrupt or with reckless disregard for the consequences of such messages on the orderly trading of the market. (Click here to access CME Group Rule 575.D. and here for ICE Futures U.S. Rule 4.02(l)(1)(C) and (D).) Exchanges have used these prohibitions to prosecute traders for:
- purportedly misusing user-defined spreads (click here to access the article “CME Group Resolves Two Disciplinary Actions Alleging Market Disruption” in the October 1, 2017 edition of Bridging the Week);
- trading in an alleged disruptive fashion at a contract’s termination (click here to access the article “Two Firms Settle With CME Group Exchanges for Not Supervising Employees Who Allegedly Engaged in Disruptive Trading Practices” in the September 10, 2017 edition of Bridging the Week); and
- supposedly testing the liquidity of a market (click here to access the article “CME Group Exchanges Charge One Trader With Impermissibly Entering Orders To Test Gold Market Latency and Another With Failure to Timely Complete Delivery” in the June 4, 2017 edition of Bridging the Week).
CME Group has also brought a disciplinary action against a non-US brokerage entity for liquidating customers’ orders following non-payment of margin calls without considering the impact of the liquidation on market prices. (Click here to access the article “CME Group Settles Disciplinary Action Alleging That Automatic Liquidation of Under-Margined Customers’ Positions By Non-US Futures Broker Constituted Disruptive Trading” in the March 20, 2017 edition of Between Bridges.)