Factors that Determine Rule 575 Violation

CME Group Market Regulation may consider a variety of factors when assessing whether conduct violates Rule 575. These factors include:

  • Whether the market participant’s intent was to induce others to trade when they otherwise would not
  • Whether the market participant’s intent was to affect a price rather than to change his position
  • Whether the market participant’s intent was to create misleading market conditions
  • Market conditions in the impacted market(s) and related markets
  • The effect on other market participants
  • The market participant’s historical pattern of activity
  • The market participant’s order entry and cancellation activity
  • The size of the order(s) relative to market conditions at the time the order(s) was placed
  • The size of the order(s) relative to the market participant’s position and/or capitalization
  • The number of orders
  • The ability of the market participant to manage the risk associated with the order(s) if fully executed
  • The duration for which the order(s) is exposed to the market
  • The duration between, and frequency of, non-actionable messages
  • The queue position or priority of the order in the order book
  • The prices of preceding and succeeding bids, offers, and trades
  • The change in the best offer price, best bid price, last sale price, or Indicative Opening Price (“IOP”) that results from the entry of the order
  • The market participants activity in related markets

Other Accountable Factors

Although the amount of time an order is exposed to the market may be a factor that is considered when determining if the order was a disruptive trading practice, there is no prescribed safe harbor. Market Regulation will consider a variety of factors, including exposure time, to determine whether an order or orders constitute a disruptive practice.

An order, entered with the intent to execute a bona fide transaction, that is subsequently modified or cancelled due to a perceived change in circumstances does not constitute a violation of Rule 575.

While execution of an order, in part or in full, may be one indication that an order was entered in good faith, an execution does not automatically cause the order to be considered compliant with Rule 575.

Orders must be entered in an attempt to consummate a trade. A variety of factors may lead to a violative order ultimately achieving an execution. Market regulation will consider a multitude of factors in assessing whether Rule 575 has been violated.

The size of an order or cumulative orders may be deemed to violate Rule 575 if the entry results in disorderliness in the markets, including, but not limited to, price or volume aberrations. Market participants should be aware that the size of an order may be deemed to violate Rule 575 if that order distorts the integrity of the settlement prices.

Accordingly, market participants should be cognizant of the market characteristics of the products they trade and ensure that their order entry activity does not result in market disruptions. All circumstances may be considered in determining whether a violation of Rule 575 has occurred and, if so, what the appropriate sanction should be for such violation.

This is part of a course on Disruptive Practices Prohibited. For official regulatory guidance on Rule 575, reference the applicable Market Regulation Advisory Notice

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