Years ago, in the 1980’s a group of commodity traders in Chicago were targeted in the pit for illegal trades. I can’t remember exactly how many but at least a half dozen traders were fined, banned from the business, or actually went to the grey bar motel for breaking the “rules”… Open outcry trading was about transparency and market price discovery through an open auction.
The rules specifically prohibited brokers disclosing orders above or below the market to any traders in the pit, because that individual trader would then have had an unfair advantage with such prior knowledge.
Also, they were punished for pre-arranged trades, based again, off of prior knowledge of resting orders or stop orders above or below the market.
The rules stated that a broker could not disclose the existence or the size of an order prior to that order actually coming within the trading range. You couldn’t, in other words, be a broker offering two thousand contracts of beans 3 cents above the market. If the market was 901 bid 902 offer, a broker could not suddenly scream out “two thousand at 905″… That was illegal. Period.
It was illegal because it disclosed a large order ahead of time, in effect off-the market. It was and is illegal to disclose even a customer’s 1 lot order above or below the market as well, but obviously, large orders have larger significance to the overall movement in the market…The point remains that disclosures such as this are part and par cell of screen trading, and one reason we have had such an increase in unprecedented daily gyrations in all markets traded electronically.
It also brings to the possiblity that two large brokers could leave these large orders on display, in effect, signalling to one another that they would like to match orders ahead of time. That action as well is illegal in the pit, but acceptable, apparently, on the screen trading platforms.
Case in point, we had a 600 or 700 lot offer in DJZ at 10, 404 yesterday and into today. It was common knowledge to anyone who had a screen, because the market logarithm disclosed bids and offers for 20 ticks on both sides. In the grains, the screen displays bids and offers for 5 to 10 cents above and below the market.
We finally ran through that level today, and instantaneously there was another 700 lot offer not at 10404, but at 10411..In effect, disclosing a large order in advance of trading there. Which brings to mind the possiblity that there are some type of pre-arranged trades being handled by having such large resting orders visible above and below the market.
If you are a huge hedge fund, and might need to move a thousand contracts, being able to see that resting order on the screen might be construed as an unfair advantage.
In the trading pits, that was and still is an illegal disclosure. People went to jail for doing that in the past.
On the screen, however, it is not.
I believe its because the trading platform was designed by people who did not have the best interest of the market in mind.
How much different would the trade be if there was only a quote visible for the existing trading range?
Screen trading would then truly mimic the process of open outcry, instead of the bastardised version of what the computers have left us with.
But that’s just my opinion. I think the screen trading platform creates some problems such as this which have yet to be- and may never be- addressed.
What was punishable by jail time, is now standard operating procedure. And unless you experienced a true open outcry market, you really wouldn’t A) know or B) understand the inherent problem with the way screen trade is processed.