Back on September 8 [6], we reported some bad news and some good news:
- The good news: starting September 15, 2014 the CME said it would no longer tolerate what is affectionately calls "Disruptive market practices." This is what we unaffectionately called HFT-market rigging practices including frontrunning, quote stuffing, churning, subpennying and so on.
- The bad news: the CME effectively admitted that it was not only tolerating and turning a blind eye toward such disruptive market practices until this point, in many cases it was compensating the "liquidity providing" perpetrators.
Today we can share the same pair of good and bad news: overnight the ICE Exchange (proud recent owner of the NYSE) decided to join the CME and reported, that "Effective January 14, 2015, subject to conclusion of the applicable regulatory review period, the Exchange will implement amendments to Rule 4.02 which consolidate the rules prohibiting disruptive trading into new subparagraph (l) and add language to provide additional clarification as to the types of practices that are prohibited."
As the bulletin below shows, the ICE is now merely the latest futures exchange where the most glaring forms of HFT market abuse will no longer be tolerated. From the just released notice [7]:
Rule 4.02 - Trade Practice Violations
In connection with the placement of any order or execution of any Transaction, it shall be a violation of the Rules for any Person to:
(l) Engage in any other manipulative or disruptive trading practices prohibited by the Act or by the Commission pursuant to Commission regulation, including, but not limited to:
(1) Entering an order or market message, or cause an order or market message to be entered, with:
(A) The intent to cancel the order before execution, or modify the order to avoid execution;
(B) The intent to overload, delay, or disrupt the systems of the Exchange or other market participants;
(C) The intent to disrupt the orderly conduct of trading, the fair execution of transactions or mislead other market participants, or
(D) Reckless disregard for the adverse impact of the order or market message.
(2) Knowingly 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.
The Q&A provides [8]some further color and confirms that this latest regulation is aimed quarely at HFTs:
Q: What does “mislead” mean in the context of the Rules?
A2: The language is intended to be a more specific statement of the general requirement that market participants are not permitted to act in violation of just and equitable principles of trade. This section of the Rule prohibits a market participant from entering orders or messages with the intent of creating the false impression of market depth or market interest. The Regulatory Division generally will find the requisite intent where the purpose of the participant’s conduct was, for example, to induce another market participant to engage in market activity.
Q: What factors will Market Regulation consider in determining if an act was done with the prohibited intent or reckless disregard of the consequences?
A11: Proof of intent is not limited to instances in which a market participant admits its state of mind. Where the conduct was such that it more likely than not was intended to produce a prohibited disruptive consequence, intent may be found. Claims of ignorance, or lack of knowledge, are not acceptable defenses to intentional or reckless conduct. Recklessness has been commonly defined as conduct that “departs so far from the standards of ordinary care that it is very difficult to believe the actor was not aware of what he or she was doing.” See Drexel Burnham Lambert, Inc. v. CFTC, 850 F.2d 742, 748 (D.C. Cir. 1988).
Q: Does Market Regulation consider cancelling an order via ICE’s Self Trade Prevention Functionality (“STPF”) or other self-match prevention technology indicative of an order being in violation of the Rules?
A14: The means by which an order is cancelled, in and of itself, is not an indicator of whether an order violates the Rules. The use of STPF in a manner that causes a disruption to the market may constitute a violation of the Rules. Further, if the resting order that was cancelled was non-bona fide ab initio, it would be considered to have been entered in violation of the Rules.
As for the punchline: momentum ignition will soon be banned!
As a reminder, momentum ignition [9]is perhaps the primary strategy that has enabled in practice what the Fed has been trying to accomplish in theory (and through printing), namely sending risk assets to all time record highs, using a highly leveraged product such as the USDJPY, which is ramped and has its momentum ignited, with the subseqent avalanche of momentum hitting all other risk assets, most notably the E-mini.
Q: Are orders entered for the purpose of igniting momentum in the market prohibited by The Rules?
A12: A “momentum ignition” strategy occurs when a market participant initiates a series of orders or trades in an attempt to ignite a price movement in that market or a related market.
This conduct may be deemed to violate the Rules if it is determined the intent was to disrupt the orderly conduct of trading or the fair execution of transactions, if the conduct was reckless, or if the conduct distorted the integrity of the determination of settlement prices. Further, this activity may violate the Rules. if the momentum igniting orders were intended to be canceled before execution, or if the orders were intended to mislead others. If the conduct was intended to create artificially high or low prices, this may also constitute a violation of the Rules
It turns out Zero Hedge was again about 2 years ahead of the curve with our December 2012 article: "Momentum Ignition" - The Market's Parasitic 'Stop Hunt' Phenomenon Explained. [9]
Again as in the case of the CME, perhaps more troubling is that these overt market manipulation "practices" will have been permitted until January 14 on what is one of the largest - if not the largest - futures exchanges in the world.
Sadly, like before, we have no idea just how the ICE (or the CME) will enforce these new regulations which go against the best interests of some of their most lucrative clients, and whether they will be enforced at all unless someone is exposed to be a violator by a third party, formerly having been called, you guessed it, a tinfoil hat conspiracy theorist.
