ICE Futures U.S. and ICE Futures Canada proposed new rules expressly prohibiting disruptive trading practices and simultaneously issued proposed frequently asked questions. The new rules are scheduled to be effective January 14, 2015.
ICE’s new rules are generally similar to a recently adopted CME Group rule—Rule 575—prohibiting disruptive trading practices, while its FAQs are also similar to the CME Group FAQs related to Rule 575 that were effective September 15, 2014—however, there are some differences. ICE Futures Canada’s disruptive trading practices rules are also somewhat different than those of ICE Futures U.S.
ICE Futures U.S.’s proposed new rule not only prohibits its own expressly enumerated disruptive trading practices, but “any other manipulative or disruptive trading practices” prohibited under the Commodity Exchange Act or by the Commodity Futures Trading Commission. This likely captures not only the express provisions of the CEA that address disruptive trading practices, but may also capture the prohibitions of the very broad CFTCRule 180.1 that precludes manipulative and deceptive devices, as well as traditonal proscrptions against manipulation.
Like CME Group, ICE Futures U.S.’s own enumerated prohibited activities include the placement of orders or market messages with the intent (1) to cancel orders before execution, or to modify orders to avoid execution; (2) to overload, delay or disrupt exchange or other market participants’ systems; and (3) “to disrupt the orderly conduct of trading, the fair execution of transactions or mislead other market participants.” At the CME Group, however, actions to disrupt the orderly conduct of trading or the fair execution of transactions are subject to an intent or recklessness standard—a broader criterion.
On the other hand, while orders or messages entered with the intent to mislead other market participants are prohibited at CME Group, under ICE Futures U.S.’s proposed rule, entering orders or market messages with “reckless disregard” for the adverse impact of such orders or messages is prohibited. This standard may capture more activity.
Also, while CME Group’s disruptive practices rule has a general preamble requiring all orders to be entered “for the purpose of executing bona fidetransactions,” ICE Futures U.S.’s proposed new rule contains a catch-all provision that appears a bit broader. It prohibits:
[k]nowingly entering any bid or offer for the purpose of making a market price which does not reflect the true state of the market, or knowingly entering, or causing to be entered, bids or offers other than in good faith for the purpose of executing bona fide transactions.
ICE Futures Canada’s catch-all provision to its disruptive trading rule—Rule 8A.10—is more similar to that of the CME Group, while its specific prohibitions parallel those of its sister US exchange. However, like CME Group, ICE Futures Canada also prohibits orders or market messages entered with the express “intent to mislead other market participants”; ICE Futures U.S.'s proposed rule does not contain this precise prohibition.
Finally, the ICE exchanges’ and CME Group’s related FAQs are similar in that both list virtually the identical factors staff will consider in assessing a potential violation. However, the ICE exchanges do not give examples of prohibited activity as does CME Group. The ICE exchanges’ FAQs contain fewer questions and answers.
(Click here to access a discussion of CME Group's Rule 575 in the article "CME Group Issues New Rule Regarding Disruptive Trading Practices" in the September 4, 2014 edition of Between Bridges. Click here to access CEA Section 4c(a)(5), which prohibits disruptive trading practices and CEA section 6(c)(3), the CFTC's traditional anti-manipulation authority. Click here to access CFTC Rule 180.1 and here to access an article describing the CFTC’s first significant use of Rule 180.1 entitled “CFTC Files and Settles Charges Against JP Morgan Chase Bank Employing Its New Anti-Manipulation Authority Related to Certain of the Bank’s London Whale Trading” in the October 14 to 18 and 21, 2013 edition of Bridging the Week.)
My View: When even a single international exchange such as ICE proposes to prohibit disruptive trading by applying different tests at two affiliates, and when different exchanges and regulators apply not only different tests but different standards to the same essential tests, it is hard to determine in advance whether contemplated trading activity is prohibited or not. Purposely placing and pulling bids or offers on one side of a market solely to move the market to effectuate an execution on the other side is likely a problem. But there can be circumstances where bluffing the market is a necessary precursor to executing bona fide hedge transactions at fair prices in an otherwise illiquid market. This area of regulation will continue to evolve, but in the interim, unfortunately, trader beware!