The focus of regulators and exchanges continues to sharpen and recent interest has zeroed in on the activity prior to the opening of the market. In products where an Indicative Opening Price (IOP) is utilized, regulatory action and fines have come down for behaviors that are deemed to be manipulative. To assist firms in managing for this regulatory requirement, Eventus Systems has introduced a new set of surveillance procedures specifically to address issues related to the IOP.
An IOP provides market participants with a probable price at which the market will open or re-open, given the current book and order activity.[1] The IOP process can be disrupted or manipulated if orders are entered that affect the calculation of the IOP but are cancelled prior to the lockout, or no-cancellation period or if orders are entered on both sides of the market in such a way as to move the IOP in a desired direction. In this second case, an example might be entering a quantity of buy orders in order to move the IOP price higher and subsequently entering a slightly larger sell order just prior to the opening, thereby receiving a higher price for the resultant net sale (or vice versa). Further, regulators are concerned in any case where there is a high percentage of cancels during the IOP time period.
As an example, in January 2018 the CME Group fined a trader and suspended his trading privileges for 30 days because of his activity during the pre-open period.[2] The exchange found that the entry and subsequent cancellation of orders by this trader caused fluctuations in the IOP and that the orders were not entered for the purpose of executing bona fide transactions, which was deemed to be a violation of Rule 575 - Disruptive Trading Practices Prohibited.
“Regulators and exchanges continue to sharpen their focus on manipulative market practices and IOP is an area that is getting quite a bit of attention lately,” said Travis Schwab, CEO at Eventus. “And many other surveillance systems don’t offer the ability to effectively monitor activity during the IOP period.”
We have a number of IOP related procedures that are becoming available as a standard feature to all users of its Validus Enterprise and Cloud platforms. The IOP surveillance procedures can be utilized on any exchanges that Validus covers in any products that have pre-opening sequences.
“We built our IOP tools in response to specific FCM requests,” according to Jeff Bell, President at Eventus. “The level of scrutiny from regulators continues to rise and firms need best in class tools to keep an eye on all areas of their business, including the period before trading begins for the day.”
Eventus Systems’ Validus is a high-performance, scalable platform for efficient and sophisticated risk management functions that span the front, middle, and back-office. The IOP functionality is one of over 125 standard procedures and reports that are available to all Validus customers, in addition to the ability to create custom output and reports. For further information please contact Scott Schroeder, Global Head of Sales at scott@eventussystems.com or 844.438.3688.
[1] CME Client Systems Wiki, https://www.cmegroup.com/confluence/display/EPICSANDBOX/Indicative+Opening+Price
[2] CME Group Notice of Disciplinary Action http://www.cmegroup.com/notices/disciplinary/2018/01/cbot-16-0547-bc-richard-whitlow.html#pageNumber=1