SMP checks in the balance

Self-match prevention (SMP) is offered by many exchanges – CME, ICE, Turquoise and BATS among them – and by the more advanced order management systems. In most cases, employing an SMP check is voluntary for trading firms; that is important because not every prevented self-match is also a prevented (illegal) wash trade. Some regulatory jurisdictions require intent as a defining characteristic of a wash trade, but even the best technology cannot read minds. SMP checks can therefore suffer from Type I errors – statistical speak for the unnecessary rejection of a legitimate order. While more advanced SMP checks aim to reduce the frequency of these errors, there is a limit to how effective they can be before they run the risk of accepting orders that should have been rejected (aka Type II errors).

The CFTC is considering making it mandatory for exchanges to offer SMP functionality and DCMs to apply some form of SMP under RegAT. Most of us would agree that a broad implementation of SMP checks is desirable for the sake of fair and safe markets. But cancelling many legitimate orders will do little to prevent wash trades and could hurt overall market liquidity. A careful balance is needed to avoid falling foul of the regulators whilst conducting legitimate business.

Leave A Comment

Copyright © 2019 Fidessa Group Holdings Limited. All rights reserved.

The information contained within this website is provided for informational purposes only. Fidessa will use reasonable care to ensure that information is accurate at the time it is made available, and for the duration that it remains on the site. The information may be changed by Fidessa at any time without notice. We also reserve the right to close the website at any time. No representation or warranty, expressed or implied, is given on behalf of Fidessa or any of its respective directors, employees, agents, or advisers as to the accuracy or completeness of the information or opinions contained herein or its suitability for any purpose and, save in the case of fraud, all liability for direct, indirect, special, consequential or other loss or damages of whatever kind that may arise from use of the website is hereby excluded to the fullest extent permitted by law. Any decisions you make based on the information in this website are your sole responsibility and information on the website should not be relied upon in connection with any investment decision.

The copyright of this website belongs to Fidessa. All other intellectual property rights are reserved.

Reproduction or redistribution of this information is prohibited except with written permission from Fidessa.