The Business Conduct Committee ("BCC") of the Chicago Board of Trade ("CBOT") fined and suspended a trader for disruptive trading practices.

The BCC ordered the trader to pay $10,000 for violations of CBOT Rule 575 ("Prohibited Disruptive Practices"). According to the BCC, the trader violated the rule by entering and then cancelling orders during the pre-opening sessions of the Wheat and Corn futures markets, which resulted in fluctuations in the publicly displayed Indicative Opening Price of those futures. In addition, the BCC suspended the trader for 25 business days.

Commentary

The CBOT Order states that the trader entered his orders "to discern the depth of the order book or the previous day's settlement price." Intuitively, this would seem to be a benign, indeed legitimate and useful purpose for such a practice. Yet by prohibiting the entry of an order "with the intent, at the time of order entry, to cancel the order before execution or to modify the order to avoid execution," the exchange makes it difficult or impossible to test the market, thus forcing all the risk of market illiquidity upon the trader. The very fact that traders apparently cannot know ex ante the depth underlying market quotes provides an incentive to commit the "offense" prohibited here. Moreover, those "who squeal[] the loudest" in such circumstances, as University of Houston Business Finance Professor Craig Pirrong explains, may not always be the good guys.