Comments Sought on Proposed Interpretive Order on Disruptive Practices Due May 17

by Eversheds Sutherland (US) LLP

The Commodity Futures Trading Commission’s (Commission) Proposed Interpretive Order on Disruptive Practices (Proposed Order) announced during the Commission’s February 24, 2011, open meeting was published today in the Federal Register. Parties have until May 17, 2011 to file comments. The Commission contemporaneously issued a Notice of Termination ending the Commission's Advance Notice of Proposed Rulemaking on Antidisruptive Practices Authority.

The Proposed Order is intended to provide guidance to market participants regarding compliance with new section 4c(a)(5) of the Commodity Exchange Act (CEA), which prohibits market participants from (i) violating bids and offers; (ii) demonstrating intentional or reckless disregard for the orderly execution of transactions during the closing period; and (iii) spoofing.

As a threshold matter, the Proposed Order expressly acknowledges that the section 4c(a)(5) prohibitions do not apply to ex-pit and off-exchange transactions, including “block trades or exchanges for related positions (‘EFRPs’) transacted in accordance with the rules of a designated contract market or [Swap Execution Facility] or bilaterally negotiated swap transactions.” (Proposed Order at ¶ 14945)

1. Violating Bids and Offers (Section 4c(a)(5)(A))

The Commission interprets section 4c(a)(5)(A) as proscribing the practice of buying a contract at a price that is higher than the lowest available offer price or selling a contract at a price that is lower than the highest available bid price. Under the Proposed Order, any such transaction would be a per se offense regardless of the trader’s intent so long as the trader exercises some control over the selection of bids or offers against which they transact. As such, the prohibition should not apply to trading on an electronic trading system that uses algorithms to automatically match bids and offers, but it will apply to automated trading systems that operate without predetermined matching algorithms.

The Commission clarifies that the prohibition “does not create any sort of best execution standard across multiple trading platforms and markets.” (Proposed Order at ¶ 14946) Instead, the Commission explains that “a person’s obligation to not violate bids or offers is confined to the specific trading venue which he or she is utilizing at a particular time.” (Proposed Order at ¶ 14946)

The Commission also clarifies that section 4c(a)(5)(A) does not prohibit executing a sequence of trades to buy all available bids or offers on a trading platform (“buying the board”) in accordance with the rules of the facility.

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