To Ping or not to Ping?

Anne PlestedHeadline items for investment firms from the ESMA Guidelines on systems and controls in an automated trading environment for trading platforms, investment firms and competent authorities are listed below:

•    comply by 1st May 2012, subject to FSA adoption
•    guidelines are based on existing MiFID current industry best practice with little need for any change envisaged by ESMA, hence the May date – will there be market push-back on this date?
•    guidelines applicable to RMs, MTFs, investment firms and firms providing DMA/SA (Direct Market/Sponsored Access)
•    organisational requirements for investment firms’ electronic trading systems (governance, capacity & resilience, business continuity, testing, monitoring & review, security, staffing, record-keeping for 5 years)
•    organisational requirements for investment firms to promote fair and orderly trading (blocking of orders by price/size parameters, trading permissions, pre-trade risk management, reporting/approval of overrides of pre-trade controls, order entry/compliance training, cross-market/platform monitoring for signs of disorderly trading, control over messaging traffic
•    organisational requirements for investment firms to prevent market abuse – firms should have adequate systems in place, with auto alerts, to monitor trading activities (own traders, algos, clients and DMA/SA for market manipulation behaviour (e.g. ping orders, quote stuffing, ramping, layering & spoofing), cross-market/cross-asset class and to flag anything likely to be suspicious – using sufficient level of time granularity
•    organisational requirements for investment firms that provide DMA/SA – naked access is prohibited, firms need to separately identify order and transactions of DMA/SA clients and be able to halt trading

There are other notes and suggestions in the report which could influence how these guidelines may be taken forward into legislation under MiFID II (and the review of the Market Abuse Directive, MAD) later in the year. I would say that audit trails to facilitate comprehensive surveillance by firms for market manipulation behaviours will quickly become a main focus. I would, however, question ESMA’s understanding of suspicious behaviour as it includes what they term “Ping Orders – entering small orders in order to ascertain the level of hidden orders and particularly used to assess what is resting on a dark platform.” After all, isn’t this just normal market interaction with dark pools?

Click here to see the ESMA Guidelines Final Report (22nd Dec 2011).

4 Responses to “To Ping or not to Ping?”
  1. Pamela Casey says:

    Liquidity aggregators need to ascertain the level of hidden orders on a dark pool in order to get the most volume they can. There are so many venues to trade, how else could we find volume without ‘Pinging’ these pools? What dark pools need to protect against are orders which ‘Ping’ their pool with the intention of gaming. The intention is key here. But how do you know who is gaming?

  2. Bruce Bland says:

    Market Abuse systems will be able to detect this “Pinging” as they form a known pattern. An example of this pattern would be a small buy order entering the dark pool and getting filled, and then a small downward price move on the market, followed by a large dark pool order being entered and filled. The gaming client is looking into the dark pool, and then trading a small amount on the primary market to move the price, and then trading a much larger order in the dark pool at a better price.
    Dark pools may also be used to detect instruments where large blocks only exist on a single side, which will likely lead to price moves in the underlying stock. This could be checked by detecting small buy and sell orders being sent in quick sucession for the same instrument.

  3. Christian Voigt says:

    It seems to me that difference between manipulation and normal interaction is the intention to trade. On the one hand, it is perfectly fine that a trader pings a pool, if the trader needs to trade into a specific direction. But on the other hand, some traders may enter orders into a dark pool without having an intention to actually execute. They only want to learn about the resting liquidity in that market and make a profit off that information. An actual execution in that dark pool is merely a cost to obtain information. I would consider the second case as manipulation.

    Unfortunately, traders do not like to express their true intentions if you ask them. Thus, you have to observe their behaviour in order to infer their intentions. The proposed changes by ESMA seem to aim exactly at that. I believe investment firms and trading platforms have to start to think much more about trading intentions of their orders.

  4. Robin Strong says:

    Pinging dark pools is normal behaviour. Most buy-sides would actually put a meaningful but small order into a pool, rather than trying a single share order e.g. I have to shift 1,000,000 shares so I might put 10,000 into a dark pool to see what fills I get, if any, and decide whether to place more or look elsewhere. That’s what our Spotlight algo does as part of its normal operation. Systematic patterns of pings would be picked up by market abuse systems, as per Bruce’s comment. If a buy-side gets a bit excited and “over-pings” the onus looks like being on the sell-side providing the DMA/SA to intervene.

    Quote stuffing is a very unique abuse issue and is really an attack against an entire exchange or market and is already illegal under various rules. Layering is also already illegal under the US regs, and possibly under MiFID too as it is clearly market abuse! (as per the Trillium case a couple of years ago) I guess the issue is explicitly defining it to avoid offenders getting off on technicalities and to determine who is responsible for detecting it – you need to have all the quotes and all the trades from all lit and dark venues in one place to detect it. There are two different types of ramping – one (“this stock is hot, Hot, HOT!”) is perfectly legal, again as I understand it, except when you have access to insider information. The other is very similar to layering and probably already be covered by the regulations. Having said all that, removing grey areas is always useful and helps clarify what is legal and what isn’t…

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