IGindex requoted already closed trade?!

[Jack Hughes]

Maybe we should ask IG how far the spread has to widen before they back out of trades retrospectively? For instance, suppose the spread had increased to, say, 400pt on the FTSE future, meaning that their quote was only about 200pt away from what they call an attainable price, would that error have been sufficiently manifest?

 

[Jack Hughes]

Yes, thanks for the facts in this post and the other one (missed it earlier). Yes, as been expected, the spread was not as huge on the futures as been reported by IG. However one must first find out how IG derive their price quote on the FTSE during that period in time. Is it for the FTSE future only, or a combination of index. If it is for the later I can't see there could have been a spread of 800 points. If they calculate their prices solely on the FTSE future there could have been a liquidity vacuum that caused a huge spread. I am afraid one must get facts on which they based their algorithm. When one knows this one can have a look at the movement and spread of the underlaying asset.

They said in the letter to the TS exactly how they calculate their price, so they've lost all credibility as far as I'm concerned.

 

[gle101]

They said in the letter to the TS exactly how they calculate their price, so they've lost all credibility as far as I'm concerned.

Are you reffering to post #83 and following explanation by IG? If not give me post no.. Apparently this guy was trading the FTSE June 10 cash contract and not the rolling daily. Incredibly easy to investigate the real value and spread of that contract during the time in question. If it turns out that IG is right in what they are claiming in post #83, I can't see that they have done anything wrong in reverting the trade.

"In relation to how IG make their prices on their FTSE contracts, I can confirm that IG take the mid-point of the underlying future market (near quarter), make an adjustment (from this level) for ‘fair value’ and apply their spread to give their Cash, May, June and September prices. The ‘fair value’ adjustment accounts for interest and dividends. Ordinarily, this spread would be 1 point so, for example, if the underlying market is quoting 5179/5180 the mid price would be 5179.5 with IG’s quote reflecting 5179/5180. However, as previously mentioned, in reaction to events in the financial markets on the evening of the 6th May, the spread in the underlying future market was widened to 800 points giving, at that time, a market bid/offer of 4000/4800 with a mid-price of 4400."

 

[Jack Hughes]

Are you reffering to post #83 and following explanation by IG? If not give me post no.. Apparently this guy was trading the FTSE June 10 cash contract and not the rolling daily. Incredibly easy to investigate the real value and spread of that contract during the time in question. If it turns out that IG is right in what they are claiming in post #83, I can't see that they have done anything wrong in reverting the trade.

"In relation to how IG make their prices on their FTSE contracts, I can confirm that IG take the mid-point of the underlying future market (near quarter), make an adjustment (from this level) for ‘fair value’ and apply their spread to give their Cash, May, June and September prices. The ‘fair value’ adjustment accounts for interest and dividends. Ordinarily, this spread would be 1 point so, for example, if the underlying market is quoting 5179/5180 the mid price would be 5179.5 with IG’s quote reflecting 5179/5180. However, as previously mentioned, in reaction to events in the financial markets on the evening of the 6th May, the spread in the underlying future market was widened to 800 points giving, at that time, a market bid/offer of 4000/4800 with a mid-price of 4400."

My point, as posted yesterday, is that if IG make their prices using this method they must realise that it only works if the underlying market's spread stays constant. We all know it doesn't, so they therefore can't really bleat about manifest errors and renege on trades when the spread widens.

 

[gle101]

My point, as posted yesterday, is that if IG make their prices using this method they must realise that it only works if the underlying market's spread stays constant. We all know it doesn't, so they therefore can't really bleat about manifest errors and renege on trades when the spread widens.

How should they calculate their prices then? You do like fixed spread I've heard.

 

[Jack Hughes]

How should they calculate their prices then?

No idea, but that doesn't matter much because I'm not running a SB company, and don't need to worry about whether the system used is designed to fail when the market is volatile!

 

[stevespray]

No idea, but that doesn't matter much because I'm not running a SB company, and don't need to worry about whether the system used is designed to fail when the market is volatile!

Well said!

...And the T&Cs support that view as it is made clear that clients are speculating the level of the firms 'own index' and not the level of the underlying market. That's basically saying that neither side can moan in this situation!

Also... even if the spread in the underlying were large a SB Co still has to pitch its market somewhere. Either that or suspend the market. But they have to make that choice at the time and not after.

I would also question the use of the phrase "manifest error". This situation is not an 'indisputable error'. Neither is it the incorrect recording of a trade which was done. If the quote on FTSE Futures market was indeed 800 wide then the trades still appear to fall inside the spread of the underlying. All that you can really say about a spread of 800 is that the true value is somewhere inside the spread.

It is clear that FTSE did take one hell of a tumble. What gets me is the fact that FTSE can take a 400 point tumble in a few minutes and that is regarded as unsurprising yet an 800 point tumble is supposed to be a completely unforseen event.

Steve

I just examined the charts from my spreadbet platform (CS) and they show a low of about 4,400. No doubt that their programs for price generation work in a similar manner. Not sure what CS did about trades executed in that time.

 

[tomorton]

I do not believe money you have not deposited in a SB company account is at any time legally yours whilst it rests in the account. It only becomes yours once they have permitted its withdrawal. As per my Stradivarius example above, if the shop (SB firm) did not permit the purchase of the violin (removal of the SB profit), at no time is the instrument (profit) yours. I would love to be proven wrong but the industry is with me I think.

 

[gle101]

Well said!

...And the T&Cs support that view as it is made clear that clients are speculating the level of the firms 'own index' and not the level of the underlying market. That's basically saying that neither side can moan in this situation!

Also... even if the spread in the underlying were large a SB Co still has to pitch its market somewhere. Either that or suspend the market. But they have to make that choice at the time and not after.

I would also question the use of the phrase "manifest error". This situation is not an 'indisputable error'. Neither is it the incorrect recording of a trade which was done. If the quote on FTSE Futures market was indeed 800 wide then the trades still appear to fall inside the spread of the underlying. All that you can really say about a spread of 800 is that the true value is somewhere inside the spread.

It is clear that FTSE did take one hell of a tumble. What gets me is the fact that FTSE can take a 400 point tumble in a few minutes and that is regarded as unsurprising yet an 800 point tumble is supposed to be a completely unforseen event.

Steve

I just examined the charts from my spreadbet platform (CS) and they show a low of about 4,400. No doubt that their programs for price generation work in a similar manner. Not sure what CS did about trades executed in that time.

Neither the real market or SB gives away free money. If their is a huge aberration with a spread that does not correlate with the underlaying index, they have the right to revert the trade. Most times this works to our advantage, this time however, it did not. This is all in line with the MiFID financial directives and I simply can't understand why you are crying rivers over this fact.

Anybody that can give information if the FTSE future had a actual spread of 800 points during that evening in question? Those who were stopped out by IG should also have a cancellation that worked in their favor on the same grounds. If not, they should dispute the fact they were stopped out on ground of a mismatch with the underlaying index.

 

[gle101]

I do not believe money you have not deposited in a SB company account is at any time legally yours whilst it rests in the account. It only becomes yours once they have permitted its withdrawal. As per my Stradivarius example above, if the shop (SB firm) did not permit the purchase of the violin (removal of the SB profit), at no time is the instrument (profit) yours. I would love to be proven wrong but the industry is with me I think.

This I don't know if it is the case. I believe the money is legally yours, that is, if if the the money is segregated and ring fenced. They can not touch it for company expenditure.

 

[Jack Hughes]

Well said!

...And the T&Cs support that view as it is made clear that clients are speculating the level of the firms 'own index' and not the level of the underlying market. That's basically saying that neither side can moan in this situation!

Also... even if the spread in the underlying were large a SB Co still has to pitch its market somewhere. Either that or suspend the market. But they have to make that choice at the time and not after.

I would also question the use of the phrase "manifest error". This situation is not an 'indisputable error'. Neither is it the incorrect recording of a trade which was done. If the quote on FTSE Futures market was indeed 800 wide then the trades still appear to fall inside the spread of the underlying. All that you can really say about a spread of 800 is that the true value is somewhere inside the spread.

It is clear that FTSE did take one hell of a tumble. What gets me is the fact that FTSE can take a 400 point tumble in a few minutes and that is regarded as unsurprising yet an 800 point tumble is supposed to be a completely unforseen event.

Steve

I just examined the charts from my spreadbet platform (CS) and they show a low of about 4,400. No doubt that their programs for price generation work in a similar manner. Not sure what CS did about trades executed in that time.

I've just looked up the OED (Spreadbet Edition) and 'manifest error' = apparently deliberate error introduced to protect IG profits during volatile marker conditions.

re. what CS did, someone could ask Simon on the other thread.

 

[gle101]

I think a vital question is, were the SB able to hedge traders positions during the market condition, at the time in question? Obvious not, with a real market spread of 800 points!

 

[stevespray]

I think a vital question is, were the SB able to hedge traders positions during the market condition, at the time in question? Obvious not, with a real market spread of 800 points!

That has no bearing in my opinion. SB Co's are market makers in their own right. They do what it says on the tin - make markets. In other words they add liquidity. In this case that is what happened. They provided a quote inside the underlying market quote. Whether or not they could instantly lay that off is of no importance as there is no contractual term or condition (set out in the Customer Agreement) which specifies that as either a condition of business or a condition from trade acceptance from the clients. If you offer a fixed spread (or a maximum spread) in certain markets then there will ALWAYS be a time when that spread will be INSIDE the spread in the underlying. You only have to look at forex on the run up to a data release to see that. Spreads in the underlying markets (ie the tier one banks) open right up to over double digit spreads meanwhile the SB Co's carry on quoting inside the underlying spreads with 2 or 3 pip spreads.

 

[gle101]

That has no bearing in my opinion. SB Co's are market makers in their own right. They do what it says on the tin - make markets. In other words they add liquidity. In this case that is what happened. They provided a quote inside the underlying market quote. Whether or not they could instantly lay that off is of no importance as there is no contractual term or condition (set out in the Customer Agreement) which specifies that as either a condition of business or a condition from trade acceptance from the clients. If you offer a fixed spread or a maximum spread in certain markets then there will ALWAYS be a time when that spread INSIDE the spread in the underlying. You only have to look at forex on the run up to a data release to see that. Spreads in the underlying markets (ie the tier one banks) open right up to over double digit spreads meanwhile the SB Co's carry on quoting inside the underlying spreads with 2 or 3 pip spreads.

Your conclusion is wrong, you must be able to offset the unbalance in the book, at the time they wasn't able to add liquidity to the real market due to the huge spread. If the market crashes, causing the underlaying asset stop functioning, which in fact what happened, resulting in a spread of 800 points. If you are unable to hedge your unbalanced positions you jeopardize the whole SB operation. MiFID support the market maker in this kind of market scenarios. Luckily this do not happen very often, and this fact together with the huge spread, proves it was an unprecedented situation for the SB and they had to act accordingly.

 

[stevespray]

I am afraid that I am not wrong. There is no obligation on the firms part to lay off your position. They certainly do not have to do it instantly. Each SB Co's is looked at by the FSA and they agree how much imbalance they can have on the order book before they have to hedge. IG are huge so are not under such pressure to hedge. Smaller SB Co's hedge much more (in theory).

I should also point out that with your theory no SB Co would be able to offer an out of hours market. If I log into my platform at 1.30 tomorrow morning I will be able to place a £50 per point long on FTSE. According to you they wont allow it as 'they cannot hedge it off in the underlying'!!

 

[gle101]

I am afraid that I am not wrong. There is no obligation on the firms part to lay off your position. They certainly do not have to do it instantly. Each SB Co's is looked at by the FSA and they agree how much imbalance they can have on the order book before they have to hedge. IG are huge so are not under such pressure to hedge. Smaller SB Co's hedge much more (in theory).

I should also point out that with your theory no SB Co would be able to offer an out of hours market. If I log into my platform at 1.30 tomorrow morning I will be able to place a £50 per point long on FTSE. According to you they wont allow it as 'they cannot hedge it off in the underlying'!!

Who said anything about obligation, they need to be able to access the underlaying asset in order to hedge the unbalanced positions. If that option is taken away by a huge spread of 800 points they can according to the MiFID act accordingly, by referring to an nonfunctional market. At the time in question the underlaying and the SB quote was not correlated at all, and thus being a cause for an erroneous price quote. The SB have some rights too, when the underlaying asset goes beyond control and they cannot guarantee a correlated price quote. It doesn't matter if some trades went through, they can afterwards refer these trades being erroneous on basis of being uncorrelated, therefore erroneous. MiFID exist and it is not only for the clients benefit. At times it will step in for the SB and this we have to acknowledge.

They can offer an off hour quote on basis of a index or a combination of index. Still you are dealing with underlaying asset as a ground for the price quote.

 

[Jack Hughes]

Sorry, gle, I agree with Steve on this one. You're underestimating the guile of SB companies, which probably don't need to hedge much, if at all, unless a punter tries to open a very large position on a thinly-traded market. The more I think about it, the more I suspect that IG deliberately derives prices in a way that gives them protection against extreme market moves by triggering the manifest error cop out. Why should we feel sorry for the SB company, when the uncorrelated prices are the direct result of their flawed system?

 

[gle101]

Sorry, gle, I agree with Steve on this one. You're underestimating the guile of SB companies, which probably don't need to hedge much, if at all, unless a punter tries to open a very large position on a thinly-traded market. The more I think about it, the more I suspect that IG deliberately derives prices in a way that gives them protection against extreme market moves by triggering the manifest error cop out. Why should we feel sorry for the SB company, when the uncorrelated prices are the direct result of their flawed system?

Jack, you have to look at the facts presented, what they have the right to do and not according to exiting regulation. They are market makers and not the real market, so there is bound to be problems along the way. Some traders try to get support from the forum members for their own case. You have to look at what is presented with an open mind, and not fall into the trap of conspiracy thinking.

 

[stevespray]

With all due respect none of my points are based on ‘conspiracy thinking’! Instead I am simply setting out and discussing the law and the terms of the Customer Agreements as I see them.

You keep using phrases like ‘non correlated quote’ which I feel is highly subjective. In my opinion if the price in the underlying is 4000 bid / 4800 ask and a SB firm decides to quote a price (on a fixed 1 point spread) which is between 4000 and 4800 then the price IS directly correlated and it is hard to argue that it’s not. You seem to be trying to promote this argument. Sorry to keep repeating myself here but the fact are those firms quoting one and two point spreads are often going to find themselves offering quotations well inside the spread in the underlying. You see to keep ducking this issue in replies.

I should also point out the old stock market adage that ‘a stock is only worth what someone else is prepared to pay for it’ – in this instance if the best bid on FTSE was only 4,000 then, at that moment in time, that is technically all it was worth. It’s also worth bearing in mind that if someone would have left a stop order with a direct access broker (at around 4000) then this may have got triggered as well. Interesting to see how this argument would shape up if time and sales actually showed a transaction at around 4,000 on the underlying.

Just as an aside, what is your view of the situation on days when FTSE gaps the SB quotes at the 8am open? By that I mean what about the days when between 7am and 8am the SB Co’s quote a particular price only to see the price jump 50 points (I’ve been trading FTSE for many years so I’ve seen this loads)? Making the correct price for FTSE is not an exact science by any means. What should happen when the SB Co’s get it wrong for an hour or so before 8am? Should those bets be reversed since the quotes provided clearly fall outside the quotation eventually seen in the underlying?

Steve.

 

[Jack Hughes]

Jack, you have to look at the facts presented, what they have the right to do and not according to exiting regulation. They are market makers and not the real market, so there is bound to be problems along the way. Some traders try to get support from the forum members for their own case. You have to look at what is presented with an open mind, and not fall into the trap of conspiracy thinking.

I don't really see it as a conspiracy, more that a highly profitable and successful business uses a system that protects itself against unusual market moves. It's crafty because they know the quotes are going to be skewed and have the luxury of waiting to see what happens, then retrospectively deciding whether it suits them to renege on trades. If only the punters had the same option!

As Steve mentioned, what would have happened if a 'real' trade had gone through at the low end of the spread (does anyone have access to the FTSE fut data)?