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ICE Takes Further Steps To Protect Itself From "Parasitic" HFT Algorithms

Tyler Durden's picture




 

As HFT algos continue to increasingly encroach on commodity trading, the most recent example of which was the berserk Nat Gas algo documented previously, the ICE has taken yet more steps to protect itself from "parasitic" algorithmic traders (a topic that has been beaten to death on Zero Hedge since the spring of 2009). From Reuters: "ICE Futures U.S. will increase its ability to adjust trade prices in softs futures, the latest in a series of changes it has made to deal with volatility in its coffee, cocoa, cotton and sugar markets. The amended rules will be effective July 1 and follow a series of changes to reduce unwarranted volatility in 2011, following the "flash crash" in equity markets in May 2010 that was exacerbated by high-frequency trading. In January, ICE delayed its attempt to mitigate cascading stops in the softs complex following feedback from market participants." Basically, the exchange has now decided to override the "market" at its sole discretion. ICE will be able to adjust trades made in coffee "C", cotton No. 2, cocoa, frozen concentrated orange juice and sugar No. 16 futures contracts. It will do this if "the exchange determines the original price of the trade does not represent the market value of the specific futures or options contract at the time of the trade," a notice states." Expect to see comparable approaches to ignoring what HFT quotes say as mini flash crashes become a now daily occurrence.

This is not the first time the ICE has had close encounters with the HFT scourge. Back in September 2010 we presented the frustration of a sugar trader following the incursion of HFT algos on the ICE. It only took several months for the ICE to realize that we voice mostly valid concerns:

The exchange has grappled with how to reduce unwarranted volatility.

ICE bowed to the World Sugar Committee's complaints about wild price swings caused by what they called "parasitic" algorithmic traders. ICE turned on the implied matching engine, which makes a correlation between contracts and preserves the spread differential, for sugar No. 11 futures.

A week after the cocoa market saw its most volatile day on record in early March, ICE announced it was expanding the range in which trades cannot be canceled for cocoa and cotton futures.

Also this year, ICE increased the daily trading limits in the cotton market, made changes to more no-cancellation ranges and revised its reasonability limits in the softs complex.

Altogether this is good news in that exchanges are finally realizing that what happens when 19 year old math Ph.D. quants set supply and demand using broken math algorithms, is not precisely price discovery.

We expect the CME to follow with comparable overriding approaches of their own. Then, eventually, the NYSE and Nasdaq will also join the fray, although by then about 1% of all stock volume will actually transact on legacy exchanges. Not even the world's biggest roll up will do much to help them at that point.

 

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Tue, 06/28/2011 - 09:00 | 1408401 Cognitive Dissonance
Cognitive Dissonance's picture

They won't rest until the entire economic system is in pieces on the shadow (co-located) exchange sever farm floor(s).

Tue, 06/28/2011 - 09:13 | 1408414 Cdad
Cdad's picture

They won't rest until the entire economic system is in pieces on the shadow (co-located) exchange sever farm floor(s).

...in the room next to where Duncan Niederauer takes his afternoon constitutional...when he has a break from IPOing Chinese fraud companies, or selling the floor of the NYSE to the Germans.

Smells like a crocodile algo day to me.


Tue, 06/28/2011 - 09:15 | 1408428 Duuude
Duuude's picture

 

ICE

 

None of the three clearinghouses would divulge the members of their risk committees when asked by a reporter. But two people with direct knowledge of ICE’s committee said the bank members are: Thomas J. Benison of JPMorgan Chase & Company; James J. Hill of Morgan Stanley; Athanassios Diplas of Deutsche Bank; Paul Hamill of UBS; Paul Mitrokostas of Barclays; Andy Hubbard of Credit Suisse; Oliver Frankel of Goldman Sachs; Ali Balali of Bank of America; and Biswarup Chatterjee of Citigroup.

Through representatives, these bankers declined to discuss the committee or the derivatives market. Some of the spokesmen noted that the bankers have expertise that helps the clearinghouse.

Many of these same people hold influential positions at other clearinghouses, or on committees at the powerful International Swaps and Derivatives Association, which helps govern the market.

Critics have called these banks the “derivatives dealers club,” and they warn that the club is unlikely to give up ground easily.

 

http://www.nytimes.com/2010/12/12/business/12advantage.html?adxnnl=1&adx...

 

 

Tue, 06/28/2011 - 09:07 | 1408405 idea_hamster
idea_hamster's picture

All they have to do in enforce the trades. 

Enforcing the rules rather than ignoring them is how the exchanges should protect themselves.

Tue, 06/28/2011 - 09:20 | 1408429 oogs66
oogs66's picture

yes, and stop with the sub penny trading.  make everything a penny which is good enough for most people and HFT struggles when they have to compete on an even playing field.

Tue, 06/28/2011 - 09:07 | 1408406 firstdivision
firstdivision's picture

A week after the cocoa market saw its most volatile day on record in early March, ICE announced it was expanding the range in which trades cannot be canceled for cocoa and cotton futures.

This is a step in the right direction equity markets should adopt.

Tue, 06/28/2011 - 09:09 | 1408413 Going Loco
Going Loco's picture

Why not ban HFT? Do what Denninger suggested and impose a rule that all orders must stand for long enough to become an actual trade if there is someone, human or algo, to take the other side? If the berserk algos pull prices out of line with what human traders think is right then the humans will step back in and take the other side of the trade and (probably) bust the owners of the algos. The problem is not really the algos. Lots of traders use systems. I use a system for some of my trades which is working just fine even in today's manipulated market. All trading systems which are based on rules and logic can be expressed algorithmically. The problem is not really the algos. The problem is HFT.

Tue, 06/28/2011 - 09:14 | 1408416 Jambo Mambo Bill
Jambo Mambo Bill's picture

This will never be fixed, as the giant squid needs it to control the market...

And Gold still going down...

Tue, 06/28/2011 - 09:15 | 1408423 oogs66
oogs66's picture

the only way to protect itself from parasites in this market would be to close

Tue, 06/28/2011 - 09:16 | 1408426 buzzsaw99
buzzsaw99's picture

if ice friend loses on trade = busted trade

anyone else = tough tittie

Tue, 06/28/2011 - 09:28 | 1408446 Mercury
Mercury's picture

 ICE will be able to adjust trades made in coffee "C", cotton No. 2, cocoa, frozen concentrated orange juice and sugar No. 16 futures contracts. It will do this if "the exchange determines the original price of the trade does not represent the market value of the specific futures or options contract at the time of the trade,"

There has to be a more elegant solution than just changing prices.  How about making HFT less HF?

Tue, 06/28/2011 - 09:29 | 1408456 mickeyman
mickeyman's picture

How does everybody get junked?

Tue, 06/28/2011 - 11:21 | 1408913 Going Loco
Going Loco's picture

There was a robojunker on the thread. It left at 09:28 and went off to trawl Mish's blog. BTW a junk or two on ZH is a badge of honour.

Interesting bit of Tyler Durden psychology - you can junk a comment on his board  but there is no way to vote FOR a comment. However you can only vote FOR a post, not against it. The worst you can do to a Tyler Durden post is give it one star. I couldn't care less about this, but there are times when I would like to junk a TD post. Other times I vote 5 stars. 

Tue, 06/28/2011 - 11:24 | 1408934 Going Loco
Going Loco's picture

I decided my previous post deserved a badge of honour. Of course this thread is now dead, so nobody will ever see it. 

Tue, 06/28/2011 - 09:36 | 1408461 NotApplicable
NotApplicable's picture

HFT bots vs. anti-HFT bots. So, will the new bots restore order, or will the humans be run out altogether?

Tue, 06/28/2011 - 09:34 | 1408466 Jambo Mambo Bill
Jambo Mambo Bill's picture

I think soon enough they gona have a retailer HFT version. "To improve your trading abilities!" Just get Super HFxT! Aprooved by the Federal Reserve".

Tue, 06/28/2011 - 11:32 | 1408951 lineskis
lineskis's picture

So instead of having a 19 years old ph.D fixing the price with a rogue algo, we'll have the exchange fixing the price. It does not look like a free price discovery... Pick your poison...

How about forcing everyone to hold on to an order for at least 1 sec (Yeah I know it's roughly a billion of nanosec...)? No more HFT front running, no more flash crash, yeah, a silly world it would be...

Tue, 06/28/2011 - 12:54 | 1409221 Siniverisyys
Siniverisyys's picture

HFT software is parasitic but regular traders are not?  Haha.

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