CME Globex anti-HFT push - Big problem???

[spearchew]

http://www.cmegroup.com/globex/resou...y-program.html
http://www.cmegroup.com/globex/files...ingProgram.pdf
http://www.cmegroup.com/globex/files/benchmarks.pdf

Hi there,

The CME directive I have linked to above, was recently brought to my attention. I am still going through it, trying to make sense of it, and I would appreciate input from more intelligent posters than I.

My basic understanding for the moment is as follows:
Due to anti-HFT sentiment, CME is discouraging traders from excessive "messaging" (e.g. Orders, Order modifications etc) to the exchange...

"Class A firms (ed: Clearing Firms?) must not exceed product-specific product benchmarks."

They list what those benchmarks are for the major CME products, as calculated by the following formula:

(Total Product Messaging / Total Product Volume + Variation)

So the Class A firms own ratio must not exceed those benchmarks. For CL the benchmark is listed as 35:1

The Class A firm volume ratio = Total Class A Firm Messaging / Total Class A Volume

So let me get this straight... Clearing firms are expected to submit only 35 messages for every 1 x CL traded? I must have misunderstood that, because it is rediculous.

I myself have an automated strategy that is constantly modifying orders... every second or two, at a minimum. So that puts me in the 40,000 : 1 ratio bracket???

I must have this completely wrong, because surely there are firms out there modifying orders dozens of times every single second, dwarfing the volume they themselves actually trade?

My thanks to anyone who is more familiar with these rules, and can calm me down LOL.

 

[spearchew]

http://s9.postimage.org/q0cc38999/CME_fail.png

probably won't apply to anyone here.
Screws me up good though.

 

[Shakone]

I have no idea how this will affect things, I don't send anywhere near that amount of messages. I don't even know why you'd need to modify orders every second or two on a single instrument. Perhaps you can explain a little as it would be very educational, and it's something I am interested in, but know nothing. Why is it so destructive to your strategy?

I read some of the research articles on Nanex, and there seem to be some issues with lots of quote stuffing and overloading the exchanges, and things are getting a bit out of hand. I'm surprised they've taken steps against it though, as every review of whether HFT causes problems seems to be stuffed full of biased people who profit from HFT, and conclude that HFT causes no problems (at least in the UK that's what it is like).

 

[BeginnerJoe]

I have no idea how this will affect things, I don't send anywhere near that amount of messages. I don't even know why you'd need to modify orders every second or two on a single instrument. Perhaps you can explain a little as it would be very educational, and it's something I am interested in, but know nothing. Why is it so destructive to your strategy?

At a guess a baiting kind of strategy would require constant change of orders, as well as trade intended to correlate with something else. If a lot of people do it, this will overwhelm the exchange's infrastructure. I reckon the restriction is for technical reasons to prevent the exchange being collapsed.

 

[spearchew]

Thanks for the intelligent replies.
I agree wrt sentiment being generally pro-HFT. That is why i am ***astounded*** by the apparent severity of constraints placed on traders by CME. Basically it is no trouble at all for me, a lone trader, to tilt a top tier clearing house in to the "fail" bracket... wtf?
I'd rather not comment on the particulars of why this is so troubling to me personally - Joe more or less guessed it anyway. I hope CME decisions are indeed down to technical reasons, rather than that they consider lots of messaging a brand of market abuse - I'm trying to help the markets, if anything.

 

[Shakone]

Thanks for the intelligent replies.
I agree wrt sentiment being generally pro-HFT. That is why i am ***astounded*** by the apparent severity of constraints placed on traders by CME. Basically it is no trouble at all for me, a lone trader, to tilt a top tier clearing house in to the "fail" bracket... wtf?
I'd rather not comment on the particulars of why this is so troubling to me personally - Joe more or less guessed it anyway. I hope CME decisions are indeed down to technical reasons, rather than that they consider lots of messaging a brand of market abuse - I'm trying to help the markets, if anything.

So if you exceed, you are fined $1000 per product group per day? Well that seems like it would only hurt the individual trader and the institutions can carry on as normal. Am I understanding this correctly Spearchew?

 

[spearchew]

After taking a second look at that, Shak, the clearing firm gets the initial 1k fine. How they portion out the blame remains to be seen. I can easily imagine that the blame trickles down to the guy ultimately responsible (me).

 

[wackypete2]

There are enough exemptions to this updated directive that makes it all just smoke and mirrors. It's a response to public outcry without alienating market makers or liquidity providers.

Peter

 

[spearchew]

Interesting interpretation Wacky. I thought maybe it was just some sham so that the next time CME are criticised, they can point to their "efficiency programme" (regardless of whether they really clamp down on messaging or not).

That said, I took a close look at the exemptions procedure. It seems the firm (clearing house) must submit details justifying why their figures were so excessive, for every instance of "fail". Seems like it would be a bit of a mission to dodge the fines day in, day out.

I noted that while the executing firms will themselves be monitored under the revised scheme, it's the clearing firm who initially gets hit with the 1000 USD penalty. Whether that gets passed on to broker/trader, I dunno. I've heard it said that clearing firms may juggle the reported trade volumes between their clients, to make sure they don't receive a "fail" on any of them - but only so far you can push that.

Guess I'll just have to wait and see if I receive any warnings.

 

[wackypete2]

My opinion is if they really wanted to crack down on hft then just outright ban it. However member firms would would be financially hurt by that. The proposal is a workaround. Remember CME is not a regulator, they exist to protect their member firms first.

This is how I see it and is not a statement of fact. Perhaps if volume is way down then protecting member firms means trying to welcome back the volume with tighter rules and limits. One thing I will concede on is that I'd much rather see CME being proactive here than the CFTC or NFA.

Peter

 

[wackypete2]

"Market participants designated by CME Group as Market Makers or enrolled in
other Exchange programs designed to promote liquidity may be exempt from the
Program or subject to Product Group Benchmarks that differ from the standard
Product Group Benchmarks."

Straight from the document.

I have to do more reading...

Peter