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The following is a letter to the editor of ADT (current issue). I found the
rational for busting trades interesting and never seen this in print before.
Note the "need for speed". If you trade the minis, this is a must read.
Tom Lisk
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From: Sean Coakley
Subject: Electronic Stops
I am a trader on CME floor. I trade the NASDAQ emini contract. I would like
to discuss the triggering of stops on the electronic platform. First I will
discuss the two events that have happened recently on the floor and then I
will ask a couple of follow up questions.
Two weeks ago at about 12:30 in the afternoon the market was dead. Everyone
was at lunch and the market was wavering around 416000. There was no
volatility to speak of. All of a sudden the Nasqaq emini contract began to
rally. In a matter of six seconds it traded all the way to 423000 and then
came back to the 416000 range. The high for the day was 420500 before this
spike. In this small time frame the regular Nasqaq contract did not blink an
eye. Frantically all the emini traders on the floor wondered if all the
trades would be busted. Before I go any further I will list the rules which
the CME uses to bust trades:
1) There must be a 10 point gap between two trades time and sales. Example
416000 416200 416300 418300 418500 418600, the gap between 416300 and 418300
would mean the trades above 416300 would be busted
2) The counter parties involved in the trades must contact the CME within 10
minutes of the trades occurence. So individuals who traded the 418300 would
have to contact the Globex control centre (GCC) for the trades above this
price to be busted.
3) There are no rules which say that the regular Nasqaq and the emini have
to correlate at all.
4) These rules are made by floor traders who have their own interests at
heart.
Well I called the GCC. I told them they should bust the trades because they
were obviously from some type of error.
The GCC only recieved one call from someone whose stop was triggered at
411000 (for the record in the six seconds between 200-300 contracts traded)
within the ten minutes. The rest of the phone calls were from members who
did not trade. The GCC decided not to bust any of the trades because they
did not find a ten point gap between any of the trades within the ten
minutes. Later they did find a ten point gap, but they still refused to bust
any trades because the GCC said the counterparties involved in the trade did
not call.
It was found later in the day that a large stop triggered the spike. I guess
someone had 30 card buy stop and did not put a limit on the stop and because
the book is so thin on these emini contracts, it just cleaned the whole book
out.
Then early this week the same thing happened at about 11:30 in the morning.
The market was 425000 and the mini shot up to 432000 and came right back
down in 10 seconds. This time they found a ten point gap and busted all the
trades above this ten point gap. All the trades above 427500 were busted.
Now I have some questions for all of you.
Should the CME be in the business of busting trades?
What kind of safety features do other electronic exchanges have in place to
prevent this type occurence?
I also believe open outcry will and is slowly dying. But is the event not an
argument for open outcry? How could you prevent this from happening on an
eletronic platform in a market like the Nasqaq which is by far the craziest
in the world on a day to day basis?
On a related topic -- in response to a comment about Globex technology
falling behind: The system at present is only able to do 15 orders per
second. But in June they are coming out with a new version which is said to
be able to do 100 orders per second. When this is rolled out Globex will
sail along smoothly.
Sadly you are right about Chicago. People on the floor of the CME do not see
the writing on the wall. They think open outcry and electronic trading can
complement each other. The CME just spent millions of dollars to double the
size of the Nasqaq pit. I disagree and believe we will be an electronic
exchange soon.
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