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Wash Trade Question


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Wash Trade Question

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  #1 (permalink)
 tradingraven 
Baltimore Md
 
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I'm trading the NQ. I have 2 systems. I use 2 different brokers for each system. My first system I'm long on the NQ. The second system I'm short on the NQ. Does this violate the hedging rule.
Thanks for help on this.

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  #2 (permalink)
Symple
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@tradingraven

First of all: What kind of rules do you think of?

Symple

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  #3 (permalink)
 kevinkdog   is a Vendor
 
 
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tradingraven View Post
I'm trading the NQ. I have 2 systems. I use 2 different brokers for each system. My first system I'm long on the NQ. The second system I'm short on the NQ. Does this violate the hedging rule.
Thanks for help on this.


Technically yes it violates Exchange rules (I don't know about it violating a hedging rule). The exchange can look at this as you trading against yourself in order to create fake volume or open interest. Just this week, I got a notice from one of my brokers (where I have 2 accounts):

"Also, being long and short the same contract in different accounts is considered an exchange violation."


A few years ago, I had to explain this type of situation with Tradestation Compliance, all the way up to the CFO of Tradestation. They had a hard time understanding why I'd have one algo short in one account, and a different algo long in another account. They really thought all my algos should have the same position at all times!

Anyhow, they finally accepted my explanation, and the case was closed. I was allowed to continue trading the same way.

In all the years I have done this (different algos in different accounts/brokers, with sometimes offsetting positions) I have never been notified by the Exchange of any issues. If they do notify me, I believe I have a good, logical and legal explanation for what I do what I do. If they disagree and prevent this, fine, I'll cross that bridge when I get to it.

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 bobwest 
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tradingraven View Post
I'm trading the NQ. I have 2 systems. I use 2 different brokers for each system. My first system I'm long on the NQ. The second system I'm short on the NQ. Does this violate the hedging rule.
Thanks for help on this.

It's not a hedging rule, it's Rule 534:

Rule 534 (“Wash Trades Prohibited”)
No person shall place or accept buy and sell orders in the same product and expiration
month, and, for a put or call option, the same strike price, where the person knows or
reasonably should know that the purpose of the orders is to avoid taking a bona fide market
position exposed to market risk (transactions commonly known or referred to as wash
trades or wash sales). Buy and sell orders for different accounts with common beneficial
ownership that are entered with the intent to negate market risk or price competition shall
also be deemed to violate the prohibition on wash trades. Additionally, no person shall
knowingly execute or accommodate the execution of such orders by direct or indirect
means.

Link: https://www.cmegroup.com/rulebook/files/cme-group-Rule-534.pdf

So, this says you can't. However....

I just read @kevinkdog's post, and what he is doing makes sense to me (and is not "hedging"). As I understood him, he had two algos and they were executing independently, and for different reasons. One said to go short, one said to go long. As I understand his point, he is saying that these should not be regarded as related and offsetting transactions, because the reasons they were taken were based on different systems that were independent and that happened to take different positions. I think he explained it well, and it did succeed with his broker. But notice that he had to argue long and hard to get it accepted.

I think a key phrase in the rule I quoted is "with the intent to negate market risk or price competition." Pretty clearly, this was not the point to Kevin.

So, in your case, what is the point? If you are running independent, automated systems that just happen at some times to be on different sides, you could make Kevin's argument.

On the other hand, one of the reasons for the rule, as I understand it, is to prevent people from putting in a lot of fake, no-risk trades that they want to fool the other market participants about, to generate the appearance of activity. This could conceivably be a problem for you, because what you are doing could raise that question. Using different brokers would keep it off the broker's radar (neither would know about the other), but I have no idea if it would attract any other attention.

So at first look, it appears not to be OK, but there is always the possibility that you could win the argument if you could show the trades are legitimate and not intended to be fakes. Which might take some work on your part. As a practical matter, given that you would be using different brokers, it might never come up. But if it did, using different brokers could easily look like an attempt to conceal something.

So what matters is what you are doing, and why. You probably would have to make the case that your trades are legitimate and not intended to create a false appearance of activity by putting in no-risk, mutually cancelling trades. This can be argued, if it's the actual case, but may take some arguing.

I'm no expert, and certainly not a lawyer, but this would be my take on it.

Bob.

When one door closes, another opens.
-- Cervantes, Don Quixote
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 kevinkdog   is a Vendor
 
 
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One possibility as a workaround. You could be long NQM22, and short NQU22, and not be in violation.

For stock indices, a spread trade like this should not add on additional risk.

I would not do this on markets like Crude Oil, grains, etc because there can be significant calendar spread risk on that type of trade.

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 elitecamper 
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You can do 1 NQ long and then 10 MNQ Short.

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 tradingraven 
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elitecamper View Post
You can do 1 NQ long and then 10 MNQ Short.

This makes the most sense to me. Thanks for you guys helping me with this.

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 kevinkdog   is a Vendor
 
 
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elitecamper View Post
You can do 1 NQ long and then 10 MNQ Short.

That is a good idea, commission cost will be higher, but no spread risk.

@tradingraven - Have you been told you can't do long NQ in one acct and short NQ in another?

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 chipwitch 
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Buy NQ Buy NQ covered Put?

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 elitecamper 
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tradingraven View Post
This makes the most sense to me. Thanks for you guys helping me with this.

If you hedge NQ with MNQ you can do it in the same account. You won't need two separate accounts for that.

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