There are particular types of disruptive order entry and trading practices that CME Group finds to be abusive to the orderly conduct of trading or the fair execution of transactions.
Such practices have historically been prohibited by and prosecuted under other Exchange rules, including, but not limited to, Rules 432.T. (“to engage in dishonorable or uncommercial conduct”), 432.B.2. (“to engage in conduct or proceedings inconsistent with just and equitable principles of trade”), and 432.Q. (“to commit an act which is detrimental to the interest or welfare of the Exchange or to engage in any conduct which tends to impair the dignity or good name of the Exchange”). CME Group adopted Rule 575 “Disruptive Practices Prohibited” in September 2014 to clarify these types of prohibited practices.
Rule 575 prohibits several types of disruptive activity. The Rule prohibits participants from engaging in the type of activity commonly known as spoofing, which is defined as bidding or offering with an intent, at the time of order entry, to cancel the bid or offer prior to execution. This type of prohibited activity typically results in a misleading appearance of buying or selling interest, a change in market depth from that misleading buying or selling interest, and an artificial price movement upward or downward in response to the misleading appearance of buying or selling interest and changed market depth.
The Rule also prohibits quote stuffing practices, which includes submitting or cancelling bids or offers to overload the quotation system of a registered entity and submitting or cancelling bids or offers to delay another person's execution of trades.
Rule 575 further prohibits intentional or reckless conduct that disrupts the orderliness of the markets. Here are some additional examples of prohibited disruptive practices.
A market participant places a buy (or sell) order that he intends to have executed; and then subsequently enters a large sell (or buy) order, or multiple sell (or buy) orders adding up to a large size, for the purpose of attracting interest to the initial buy (or sell) order.
The market participant placed these subsequent orders to induce, or trick, other market participants to execute against the initial order. Immediately after the execution against the initial order, the market participant cancels the remaining orders.
During the pre-opening period on CME Globex, a market participant enters a large order priced through the IOP (a bid higher than the existing best bid or an offer lower than the existing best offer) and continues to systematically enter successive orders priced further through the IOP until he causes a movement in the IOP, which prompts him to cancel all of his orders.
The market participant continues to employ this strategy on both sides of the market for the purpose of determining the depth of support at a specific price level for the product before the market opens.
A market participant enters orders into the market with reckless disregard for the adverse impact on orderly trading. This could happen when a broker received a large customer order in a product that is illiquid. Looking at the depth of the orderbook would show that filling that order at the market would trade through several price levels and cause significant price movement.
Or a market participant designs an algorithm to be used in a very liquid market but subsequently uses the algorithm in a very illiquid market without making amendments to the algorithm. The algorithm gets stuck in a looping pattern in responding to itself and causes pricing aberrations.
This is part of a course on Disruptive Practices Prohibited. For official regulatory guidance on Rule 575, reference the applicable Market Regulation Advisory Notice.