So, the law says it's legal to place order and then change one's mind and cancel it, but is not legal to place order with the intent to cancel later? Seriously?
1. Quote and trade data must be time stamped by the exchanges at the time it is generated. This will ensure delays can be detected by everyone.
Reasoning: Changing the procedure to time stamp at the time a quote or trade is generated is a near trivial exercise. It probably comes as a surprise to many that time stamping isn't done that way now.
2. Quote-stuffing should be banned.
Reasoning: It is a manipulative device designed to overload the quotation system. Quote and trade dissemination (data feed) is a finite resource, and should be treated as such.
3. Add a simple 50 millisecond quote expiration rule: a quote must remain active until it is executed or 50ms elapses. If the quote is part of the NBBO, it may be improved (higher bid or lower offer price) at any time without waiting for the expiration period.
Reasoning: The exchanges must protect the integrity of the National Best Bid/Offer system. What is the point of having a National Best Bid/Offer, if not everyone in your nation (apologies to Alaska/Hawaii) can reasonably execute a trade against it? 50ms is approximately the time it takes light and electronic communication to travel from New York to California and back. It is impossible to transmit information any faster. This rule would not limit quote/trade rates. So long as trades are executing, quotes can update thousands of times a second. Only a small percentage of quotes today would be affected and the potential for catastrophically high rates would be eliminated.
Source: http://www.nanex.net/20100506/FlashCrashAnalysis_CompleteTex...
My 2 cents... the CFTC/SEC/DOJ have suffered too much embarrassment to ever adopt these sensible recommendations. Sadly I think we'll need to suffer a few more flash crashes before something is done.
Quotes and trades are typically generated on different systems. There are CAP ramifications for implementing this that may be much worse than the fix.
> 2. Quote-stuffing should be banned.
If you mean quote stuffing as DDoS, this is banned and is trivially prevented by the exchange. If you mean quote stuffing as in layering, that is illegal and is not trivially prevented.
> 3. Add a simple 50 millisecond quote expiration rule: a quote must remain active until it is executed or 50ms elapses.
This may or may not have CAP implications. I'm curious why 50 ms is chosen? Click traders won't be able to respond to this (and you've already mentioned Alaska/Hawaii) so it won't be "everyone" in any case.
Finally what does the NBBO have to do with CME trades? These were futures contracts that have no legal requirements with regard to the NBBO. They do of course have a correlation with the NBBO just like equities exchanges in Europe and Asia do. Do you intend to regulate the venues globally?
The problem is that the term quote stuffing is used to describe both this and the practice of spamming orders into an exchange (which I don't think happens much) for nefarious purposes.
What you are describing I've heard as layering and or stacking orders and is not illegal assuming your intent is to have those orders trade.
As always, definitions are important.
As for quote stuffing, this sort of thing was happening by accident in the early to mid 2000s due to the failure of some exchanges to upgrade their hardware infrastructure to handle legitimate volume. In this sort of environment, it would be easy to get away with spamming/DOS'ing the exchange to put competitors behind, but I doubt that this lack of investment still persists. Might still be possible in less-developed markets though.
- hard-cap the number of cancellations a trader can order
- penalize traders if they have too many cancelled orders (delay further transactions)
- add a cost to cancellation
Why does this require police action? Is the exchange just using the police as a bulldog to avoid having to implement technical fixes for these problems?
The thing about spoofing is that it doesn't require tons of cancels. Done right it falls well within the bounds of normal trading ratios.
The latter would constantly chase orders with cancels with only microseconds in-between them.
The best firms can respond to a tick in under 10 microseconds, so bad behavior really can't stay on the book for more than 10s of microseconds.