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CME Rule 575

  #26 (permalink)

New York, NY
 
Trading Experience: Beginner
Platform: Vanguard 401k
Broker/Data: Yahoo Finance
Favorite Futures: Mutual funds
 
Posts: 1,046 since Jul 2012
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Big Mike View Post
I strongly disagree. Naturally @artemiso has more experience in this area than me, and I hope he comments. But it seems to me the new rules are just a show and have loopholes big enough to drive an armored truck full of the money they made trading against these rules through them.

Basically it's just a matter of intent/opinion. "But sir, when we placed that order, we would have been willing to get executed on it. Unfortunately, that didn't happen and was out of our control, so we had to cancel it". x 1 million per day.

Mike

I did promise to respond to this but had no time.

My view is that this is a step forward, but as mentioned, there's no clarification on how "intent" is proven but the industry consensus and a poll of CME employees seems to support this view and reinforce that we're still relying on primitive means (e.g. emails between traders admitting that their algorithm was designed to be exploitative).

But this isn't the main problem.

I think that the most crucial problem about Rule 575 is that there is no mention that the clearing firms have the responsibility to monitor orders and that the exchange is not providing a standardized tool or guidelines for clearing firms to enforce the rule.

Functionally, the hefty fines already encourage the clearing firms to err on the side of caution with regards to their counterparties (e.g. http://www.finra.org/web/groups/industry/@ip/@enf/@ad/documents/industry/p300012.pdf) but I believe we can improve on that. The next step forward is for the exchange to implement standardized electronic tools that clearing firms use to flag their orders. Frankly, I don't think that the smaller FCMs have the resources to develop robust software of this nature and besides, I'd (and I assume everyone else would much) rather such software be standardized. Our Canadian neighboors already have such a practice and I think it's a good idea.

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