Flipping is defined as the entry of orders or trades for the purpose of causing turns of the market and the creation of volatility or instability.
A “flip” order typically has two main characteristics: it is an aggressor order and an opposite order is cancelled shortly before the entry of the order. An example would be if a trader flips from offering to bidding at the same price.
Market Regulation recognizes there are many variables that can cause a market participant to change perspective on the market. This rule, therefore, does not prohibit a market participant from changing his bias from short to long or vice versa.
Flipping activity may be disruptive to the marketplace. For example, repeated instances of a market participant entering flipping orders that are each large enough to turn the market (i.e., being of a sufficient quantity to sweep the entire quantity on the book at the particular price level and create a new best bid or best offer price with any remaining quantity from the aggressor flipping order) can be disruptive to the orderly conduct of trading or the fair execution of transactions.
Factors Considered when Determining Disruptive Flipping
In considering whether conduct violates Rule 575, market regulation would consider:
- The impact on other market participants
- Price fluctuations
- Market conditions in the impacted and related market(s)
- The participant’s activity in related markets
- Whether the flip involved the cancellation of a large order(s) relative to the existing bid/offer depth
- Whether repeated flipping turned the market back and forth (i.e., the first flip turns the market in favor of the offer/bid and the second flip turns the market in favor of the bid/offer)
Frequently Asked Questions
Does market regulation consider cancelling an order via CME Group’s Self-Match Prevention functionality or other self-match prevention technology indicative of an order being in violation of Rule 575?
The means by which an order is cancelled is not an indicator of whether an order violates Rule 575. The use of self-match prevention functionality in a manner that causes a disruption to the market may constitute a violation of Rule 575. Further, if the resting order that was cancelled was non-bona fide to begin with, it would be considered to have been entered in violation of Rule 575.
Am I allowed to enter order(s) at various price levels throughout the order book in order to gain queue position, but subsequently cancel those orders as the market changes?
It is understood that market participants may want to achieve queue position at certain price levels and given changing market conditions may wish to modify or cancel those orders. In the absence of other evidence that the orders were entered for disruptive or misleading purposes, or with reckless disregard for the adverse impact on the orderly conduct of trading or the fair execution of transactions, they would not constitute a violation of Rule 575.
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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