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CME Rule 575
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CME Rule 575

  #21 (permalink)
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artemiso View Post
I'm busy and will probably come back to comment later but a few quick points:

1. Explaining code to a room full of compliance guys is impossible.
2. Code can be made up to tell any story.
3. There are so many moving pieces that backtracing it is going to take too much explaining.

What's wrong with modifying orders 1 million times per day? In liquid equities and futures, you're only seeing about 10 order actions per execution. In options, I've seen 10,000+++ order actions per execution.

In fact, if people think canceling orders gives you such an advantage, why not do it yourself? The restrictions are tougher on high volume participants than retail participants. You can add and cancel the same order 500 times on the Eurodollar and you will still not get flagged. I can't get away with 6.

I was just using cancellations as an example.

As for why I don't do it myself, well... that would be like me having a BB gun and heading into a war with all the big firms that have nukes, tanks, drones, etc. It's stupid to think I can compete.

But I don't want to stray off topic. I am not interested in competing with those guys.

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  #22 (permalink)
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Big Mike View Post
As for why I don't do it myself, well... that would be like me having a BB gun and heading into a war with all the big firms that have nukes, tanks, drones, etc. It's stupid to think I can compete.

Well, my point is more like: we have a BB gun with 6 pellets and most people have a BB gun with 500 pellets. But some data providers make it sound as if we have an orbital bombardment warhead or something.

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  #23 (permalink)
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One of the concerns I have is whether this has a knock on effect on the people that make a living providing liquidity in the markets.

I think the "intent" part is actually covered in there:

"Q1: What factors may Market Regulation consider in assessing a potential violation of Rule
575?
A1: Market Regulation may consider a variety of factors in assessing whether conduct violates Rule
575, including, but not limited to:
• whether the market participant’s intent was to induce others to trade when they otherwise
would not;
• whether the market participant’s intent was to affect a price rather than to change his
position;
• whether the market participant’s intent was to create misleading market conditions;
• market conditions in the impacted market(s) and related markets;
• the effect on other market participants;
• the market participant’s historical pattern of activity;
• the market participant’s order entry and cancellation activity;
• the size of the order(s) relative to market conditions at the time the order(s) was placed;
• the size of the order(s) relative to the market participant’s position and/or capitalization;
• the ability of the market participant to manage the risk associated with the order(s) if fully
executed;
• the duration for which the order(s) is exposed to the market;
• the duration between, and frequency of, non-actionable messages;
• the queue position or priority of the order in the order book;
• the prices of preceding and succeeding bids, offers, and trades;
• the change in the best offer price, best bid price, last sale price, or Indicative Opening
Price (“IOP”) that results from the entry of the order; and
• the market participant’s activity in related markets."

But I do think that legitimate market makers (who we do need) might be the baby that gets thrown out with the bathwater...

Also - what is the method of enforcement - does each case need to go through the courts? If so - I have to wonder how effective it will be when the larger outfits get lawyered up and argue their case.

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  #24 (permalink)
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Rule 575 in effect yet?

I've just began to study real time quote, in this case for hg. Just today 10/14,2014, I am still seeing something like this.

Q,QHGZ14,3.0450,1,02:25:07.809,113,6197,3.0450,1,3.0455,4,3.0415,3.0475,3.0320,3.0405,C,01,
Q,QHGZ14,3.0450,1,02:25:07.809,113,6197,3.0445,11,3.0455,4,3.0415,3.0475,3.0320,3.0405,b,01,
Q,QHGZ14,3.0450,1,02:25:07.809,113,6197,3.0445,11,3.0455,5,3.0415,3.0475,3.0320,3.0405,a,01,
......
Q,QHGZ14,3.0450,1,02:25:07.809,113,6197,3.0440,11,3.0450,6,3.0415,3.0475,3.0320,3.0405,b,01,
......
Q,QHGZ14,3.0450,1,02:25:07.809,113,6197,3.0445,9,3.0450,4,3.0415,3.0475,3.0320,3.0405,a,01,

Total of 73 orders and cancellations in the same millisecond after one actual order that was executed.


So at exactly 02:25:07.809 (809/1000 seconds), someone made a market order to sell. Then in that same millisecond, 73 orders and order cancellations happened.

This is how I read it. After the one actual contract that had changed hands, there were still 11 bids to buy. In the same millisecond, all of those 11 bids were cancelled one by one (sometimes by two). Since all bids at 3.0445 were cancel, quote then shows 11 bids at next tick 3.0440. Then 6 of those bids were eventually cancelled, then were then were later placed back in so we have 11 bids at 3.0440 again. Heck, then bids at 3.0445 that were cancel mysteriously re-emerge into the system again (9 out of 11 anyway).

All of this happen so fast that human eyes can't even see. This doesn't make sense, or maybe I am not smart enough yet to figure out. How is profit generated by placing and cancelling so many orders all within one millisecond. They were cancelled so fast that there was no way that any human or computer can actually submit a market order to trade it. 73 orders and cancellations just because of one actual contract changing hand, and that's after Rule 575. If that is quote stuffing and I can't imageine what are they trying to hide?

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  #25 (permalink)
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oasisjoe View Post
All of this happen so fast that human eyes can't even see. This doesn't make sense, or maybe I am not smart enough yet to figure out. How is profit generated by placing and cancelling so many orders all within one millisecond. They were cancelled so fast that there was no way that any human or computer can actually submit a market order to trade it.

The goal of the sequence of order updates is not to generate abusive profits, it's to allow the market maker to adjust to the most recent market conditions and provide you with improved and the best-priced liquidity.


oasisjoe View Post
73 orders and cancellations just because of one actual contract changing hand, and that's after Rule 575. If that is quote stuffing and I can't imageine what are they trying to hide?

If my goal is to lag/slow down the exchange's subsystems and other market participants, what's the point of spamming quotes? There's a much more effective way to do it - I'm within the exchange's firewall and can ping flood/DDoS attack their market data subsystems directly if I really wanted to lag everyone.


Last edited by artemiso; October 14th, 2014 at 09:35 AM. Reason: Shortened explanation (sorry for spam below)
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  #26 (permalink)
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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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