True intensions: taking on trading strategies
With the advances made in automated trading in recent years,
regulators are having to work pretty hard to catch up with the markets.
Esma currently has two documents out for consultation on the
Market Abuse Regulation (MAR) and has announced a public hearing on October
8th. In parallel, last week saw the publication of the CME’s Rule 575 on
disruptive trading.
The implications of automated trading are under scrutiny on
both sides of the Atlantic. The CME states in its new rule that traders can
only enter orders with the purpose of executing them.
Even though this sounds fairly harmless, it becomes
extremely potent considering that many schemes such as ramping, spoofing or
quote stuffing rely on cancelling orders before they are executed.
While MAR also has the notion of intention to execute, it
goes a step further and explicitly acknowledges that algorithmic/HFT strategies
can be abusive in themselves.
Obviously it is always difficult to determine the intentions
of traders and whether submitted orders were meant to be executed, but new
technologies makes it easier in some ways too.
In the old trading floor days strategies were only in the
head of the trader, but nowadays trading strategies are well documented in the
source code and in the audit trails, explicitly naming all trading signals and
the corresponding reactions.
That gives the regulator a much better chance to decipher a
trader’s true intentions, even in a complex world like ours.
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