True intentions

With the advances made in automated trading in recent years, regulators are having to work pretty hard to catch up with the markets. ESMA currently has two documents out for consultation on the Market Abuse Regulation (MAR) and has announced a public hearing on October 8th. In parallel, last week saw the publication of the CME’s Rule 575 on disruptive trading.

The implications of automated trading are under scrutiny on both sides of the Atlantic. The CME states in its new rule that traders can only enter orders with the purpose of executing them. Even though this sounds fairly harmless, it becomes extremely potent considering that many schemes such as ramping, spoofing or quote stuffing rely on cancelling orders before they are executed. While MAR also has the notion of intention to execute, it goes a step further and explicitly acknowledges that algorithmic/HFT strategies can be abusive in themselves.

Obviously it is always difficult to determine the intentions of traders and whether submitted orders were meant to be executed, but new technologies makes it easier in some ways too. In the old trading floor days strategies were only in the head of the trader, but nowadays trading strategies are well documented in the source code and in the audit trails, explicitly naming all trading signals and the corresponding reactions. That gives the regulator a much better chance to decipher a trader’s true intentions, even in a complex world like ours.

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