There are types of disruptive order entry and trading practices that the CME Group exchanges find 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, the following:
The CME Group exchanges adopted Rule 575, “Disruptive Practices Prohibited,” in September 2014 to provide additional clarity on the types of prohibited practices in CME Group markets.
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.
Rule 575, Disruptive Practices Prohibited, states that:
All orders must be entered for the purpose of executing bona fide transactions. Additionally, all non-actionable messages must be entered in good faith for legitimate purposes.
No person shall enter or cause to be entered an order with the intent, at the time of order entry, to cancel the order before execution or to modify the order to avoid execution;
No person shall enter or cause to be entered an actionable or non-actionable message or messages with intent to mislead other market participants.
No person shall enter or cause to be entered an actionable or non-actionable message or messages with intent to overload, delay, or disrupt the systems of the Exchange or other market participants; and
No person shall enter or cause to be entered an actionable or non-actionable message with intent to disrupt, or with reckless disregard for the adverse impact on, the orderly conduct of trading or the fair execution of transactions.
The provisions of this rule apply to both open outcry trading and electronic trading activity. Additionally, the provisions of this rule apply to all market states, including the pre-opening period, the closing period and all trading sessions.
As referenced in the rule, actionable messages are messages that can be accepted by another party or otherwise lead to the execution of a trade. An example of an actionable message is an order message. Non-actionable messages are those messages submitted to the exchange that relate to a non-actionable event. Examples of non-actionable messages include Requests for Quotes, creation of User-Defined Spreads (UDS) or User-Defined Instruments (UDI), and administrative messages.
Proof of intent is not limited to instances in which a market participant admits its state of mind. Where the conduct was such that it more likely than not was intended to produce a prohibited disruptive consequence, intent may be found.
Claims of ignorance, or lack of knowledge, are not acceptable defenses to intentional or reckless conduct. Recklessness has been commonly defined as conduct that “departs so far from the standards of ordinary care that it is very difficult to believe the actor was not aware of what he or she was doing.” See Drexel Burnham Lambert, Inc. v. CFTC, 850 F.2d 742, 748 (D.C. Cir. 1988).
This is part of a course on disruptive practices. For official regulatory guidance on disruptive practices, reference the applicable Market Regulation Advisory Notice.