By: Christopher Waitz, Director of Regulatory Affairs, Eventus
The prohibition against disruptive trading practices and market manipulation is a foundational element for most regulatory and self-regulatory regimes globally. Certain abusive behaviors, such as Spoofing or Marking the Close (also known as “Banging the Close”), receive the most attention from regulators and compliance teams. However, activity that disrupts the orderly conduct of trading, demonstrates a reckless disregard for orderly trading, or causes an “adverse price impact” is also likely to be prohibited under disruptive trading rules whether done intentionally or not.
Disorderly trading may have the following characteristics:
- A breakdown in the correlation between price changes and the volume of trades
- An irrational relationship between consecutive prices
- Levels of volatility that significantly reduce liquidity
- A breakdown between the relationship of a derivative and its underlying asset
- Repeated instances of trading that cause turns in the market
- Disrupting or delaying the functioning of the trading system
- Repeated instances of igniting momentum in the market with a succession of orders
- A price spike followed by sudden reversal
Exchanges and regulators expect market participants to know the characteristics of the markets they operate in and to evaluate market conditions relative to the size of orders they place and the method of execution. Not all instances of disruptive trading may be intentional, but a reckless disregard for the orderly conduct of trading may still be prohibited and additionally raise the question of whether there was effective, diligent supervision in place as is required.
Validus in Practice (ViP): Validus’ trade surveillance and algo monitoring tools offer a suite of procedures designed to detect potential disruptive trading, including adverse price impact. The procedures are used by Broker-Dealers, Futures Commission Merchants (FCMs), Introducing Brokers, Exchanges, and traders across asset classes. Validus includes alerts designed for a range of use cases:
- Trades or orders that exceed a percent of Average Daily Volume (ADV)
- Trades outside of the market best bid or offer at the time of execution
- Trades or orders that exceed a quantity or notional amount
- Orders that execute through multiple levels of the order book over a short period of time
- Sequential fills in a short period of time with substantially different prices
- A series or orders and fills which move the market a significant amount
- Identifying price moves based on market data whether or not initiated by internal trading
- Placing orders during the pre-open period that impact published price indications
- Identifying orders placed near the close that appear to have influenced the closing price
About Eventus
Eventus is a leading global provider of multi-asset class trade surveillance, market risk and anti-money laundering (AML) solutions. Its powerful, award-winning Validus platform is easy to deploy, customize and operate across equities, options, futures, foreign exchange (FX), fixed income and digital asset markets.
Validus is proven in the most complex, high-volume and real-time environments of tier-1 banks, broker-dealers, futures commission merchants (FCMs), proprietary trading groups, market centers, buy-side institutions, energy and commodity trading firms, and regulators. The company’s rapidly growing client base relies on Validus and Eventus’ responsive support and product development teams to overcome its most pressing regulatory challenges. For more, visit www.eventus.com.