No spoofing (really)

September 15, 2014 10:58 AM

Effective September 15, 2014, The Chicago Mercantile Exchange, Inc. (CME), the Board of Trade of the City of Chicago, Inc. (CBOT), the New York Mercantile Exchange, Inc. (NYMEX), and the Commodity Exchange, Inc. (COMEX), notified the Commodity Futures Trading Commission (CFTC) of the adoption of Rule 575 (“Disruptive Practices Prohibited”).

The Exchanges will also adopt the CME Group Market Regulation Advisory Notice RA1405-5, which provides the text of Rule 575 as well as additional regulatory guidance on various types of prohibited disruptive order entry and trading practices which the Exchanges find to be abusive to orderly conduct of trading or the fair execution of transactions. As of Friday, August 29, 2014, RA1405-5 was circulated in the marketplace.

Rule 575 forbids some of the other disruptive practices added to Section 4c(a) of the Commodity Exchange Act as subparagraph (5) by Section 747 of the Dodd-Frank Act. Specifically the new rule bans activity identified by the Commission as “spoofing,” “quote stuffing practices,” and the disorderly execution of transactions during the closing period. RA1405-5 provides a Question and Answer section as well as a non-exhaustive list of examples considered to be disruptive and in violation of Rule 575 by the Exchanges.

Covering a wide range of conduct, these examples are intended to ensure that market participants have detailed information attendant to the breadth of the new Rule and conduct that is expressly prohibited by the Rule. RA1405-5 also clarifies that other disruptive practices not covered by the new rule may continue to be prosecuted under other rules of the Exchanges.

In addition to being in accordance with Section 4c(a), Subparagraph (5) of Act, the Market Regulation Department and the Legal Department collectively reviewed the designated contract market core principles (“Core Principles”) as set forth in the Commodity Exchange Act (“CEA” or “Act”). During the review they determined that the adoption of new Rule 575 and the issuance of RA1405-5 may also have some bearing on the following Core Principles:

Compliance with Rules: Rule 575 is being adopted to expressly prohibit abusive trading practices on the CME Group designated contract markets, as is required by this Core Principle. Rule 575, in combination with RA1405-5, provide the marketplace with a detailed description of the conduct deemed by the Exchanges to constitute disruptive activity in their markets.

Availability of General Information: As required by this Core Principle, the Exchanges are disseminating RA1405-5 to the marketplace on August 29, 2014. RA1405-5 includes the complete text of Rule 575 in addition to an FAQ section and list of examples of disruptive practices that are prohibited.

Execution of Transactions: Core Principle 9 requires exchanges to provide a competitive, open, and efficient market and mechanism for execution of transactions that protects the price discovery process of trading in the centralized market. The practices prohibited by Rule 575 apply to trading in the Exchanges two competitive execution venues, CME Globex and open outcry trading pits. The Rule is intended to codify certain activities which the Exchanges deem not to be conducive to the price discovery process and the efficient operation of their markets.

Protection of Market Participants: Rule 575 and RA1405-5 are expressly intended to protect Exchange markets and market participants from abusive practices and to promote fair and equitable trading on their markets. The Exchanges are adopting the new Rule and issuing RA1405-5 to codify certain activities deemed to be disruptive, and which harm other market participants.

The text of new Rule 575 appears in Exhibit A and a copy of RA1405-5 appears in Exhibit B. The Exchanges certify that Rule 575 and RA1405-5 comply with the Act and the regulations thereunder. There were no substantive opposing views to this proposal.

About the Author