The CME Group recently published new Rule 575 (Disruptive Practices Prohibited) and accompanying Market Regulatory Advisory Notice (MRAN) 1405-5. Rule 575 prohibits the use of certain disruptive trade practices such as “spoofing,” and other trade practices also prohibited by Section 4c(a) of the Commodity Exchange Act, as amended by the Dodd-Frank Act. The rule prohibits certain conduct, which was previously prosecuted by Market Regulation under Rule 432.T (dishonorable or uncommercial conduct), Rule 432.B.2 (conduct inconsistent with just and equitable principles of trade) and 432.Q (conduct detrimental to the interest or welfare of the Exchange or impair the dignity or good name of the Exchange).
Rule 575 provides that all orders must be entered for the purpose of executing bona-fide transactions. Additionally, all non-actionable exchange messages must be entered in good faith for legitimate purposes. Rule 575 applies to both electronic and open outcry trading, as well as to all market periods such as the pre-opening period, the closing period and all trading sessions. Rule 575 further provides as follows:
- No person shall enter or cause to be entered 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;
- No person shall enter or cause to be entered an actionable or non-actionable message or messages with intent to mislead other market participants;
- No person shall enter or cause to be entered an actionable or non-actionable message or messages with intent to overload, delay or disrupt the systems of the Exchange or other market participants; and
- No person shall enter or cause to be entered an actionable or non-actionable message with intent to disrupt, or with reckless disregard for the adverse impact on, the orderly conduct of trading or the fair execution of transactions.
The accompanying MRAN 1405-5 includes 22 FAQs interpreting Rule 575 and addressing its application. For example, FAQ 1 sets forth 16 factors that may be indicative of whether a Rule 575 violation occurred, including, among other things, the following: (i) whether the market participant intended to induce others to trade when they otherwise would not; (ii) the effect on other market participants, (ii) the market participant’s historical pattern of activity, (iii) the ability of the market participant to manage the risk associated with the order if fully executed, and (iv) the duration for which the order is exposed to the market.
Notably, FAQ 16 highlights that violations of Rule 575 will not be limited to situations where the market participant intended to engage in a disruptive trade practice, but also includes those circumstances where the market participant’s conduct was “reckless.” MRAN 1405-5 also provides 9 illustrative examples of trade practices prohibited by Rule 575. The rule became effective on September 15, 2014.