The Complete Guide to Trade Reconstruction Compliance. Table of Contents,1 Why Trade Reconstruction Why Now 3. 2 How Did We Get Here 3,2 1 United States 4,2 2 EMEA 6. 3 The Role of Trade Reconstruction in Enforcement 11. 3 1 Insider Trading 11,3 2 Spoofing Layering and Front Running 13. 4 Technology and How It Can Help 18, 4 1 Trade Lifecycle Data including pre and post execution 18. 4 2 The Process 18,Copyright 2018 NICE 2, The Complete Guide to Trade Reconstruction Compliance. 1 Why Trade Reconstruction Why Now, Throughout 2017 the Commodity Futures Trading Commission CFTC and the National Futures. Association NFA communicated in no uncertain terms that firms had sufficient time to fully. implement NFA expects that swap dealers will, maintain full complete and systematic records of all swap activities as required by. regulations This includes a complete and accurate trade reconstruction under Regulation. Almost five years after swap dealers first became provisionally registered firms still struggle with. this requirement Examinations over the past 18 months found several swap dealers failed to. maintain adequate records necessary to conduct a comprehensive and accurate trade. reconstruction for each swap In particular NFA has uncovered deficiencies relating to the ability. to recreate pre trade communications With the introduction of MiFID II in the European Union. EU and ongoing NFA examinations in the United States US trade reconstruction is a. challenge that firms must overcome immediately,2 How Did We Get Here. Reconstructing the events surrounding a trade is a challenge many firms are familiar with. Thousands of man hours have been spent locating compiling reviewing and reporting on trade. data and associated communications on a segment of the billions of trades that occur every. day As regulations evolve through the various geographic regions of North America EMEA and. APAC trade reconstruction becomes an increasingly vital piece of regulatory compliance As a. result efficient and complete trade reconstruction processes are a necessity for business. operations, here The process of trade reconstruction had humble beginnings as the human element and. lack of technology limited the amount and type of data that could be returned As advancements. in technology have occurred the demand by regulators for a clearer picture of all the elements of. a trade has grown Now the environment has reached the point where regulators are looking for. a complete trade reconstruction including all communication channels and data from each part. of the trade process This requires effective data management of the disparate data and. communications associated with a trade, In spite of the continued challenges involved in the trade reconstruction process the regulations. requiring trade reconstructions continue to expand to worldwide significance The largest. markets in the world rely on trade reconstruction either directly or implicitly as a powerful. regulatory tool To that end it is imperative that firms not only understand what a complete trade. reconstruction consists of but also how regulators in competent jurisdictions use them in. enforcement actions and to preserve market integrity. Copyright 2018 NICE 3, The Complete Guide to Trade Reconstruction Compliance. 2 1 United States, Firms complying with Dodd Frank are held to strict record keeping requirements In the U S the. Record keeping mandates detailed in 17 CFR 23 202 and 17 CFR 23 203 require firms to. produce a complete time sequenced record of a swap trade within 72 hours of a regulatory. request 1 The regulation may only be 6 years old but the use of record keeping as an. enforcement tool is hardly a new phenomenon The origin of trade reconstructions dates back to. In a release issued on December 18 1975 the CFTC announced its intention to require all. contract markets that allowed dual trading to establish a system for time sequencing trades in. order to detect abuses more readily 2, either traded through a competitive system called open outcry or in designated areas on the. floor of the exchanges called trading pits Each system consisted of floor participants verbally. bidding and offering to each other at centralized locations Tickets were prepared and time. stamped at various points throughout the process i e receipt of an order from customer upon. receipt of an order ticket by the trading floor or upon execution of the order. Regulators would routinely pick up tickets from the trading floor and inspect them for a time. stamp If an unstamped ticket was discovered the regulator would often compile the. corresponding tickets from the trade attempt to create a timeline of events and reconcile the. information Any discrepancies were fined sometimes instantly The CFTC found that detecting. trading abuses through the records kept by contract markets required a laborious cross. referencing of data Gaps in the audit trail were frequent since time and sales data did not record. the size of transactions Consequently in markets with rapidly fluctuating prices it was often. difficult to determine execution times for orders executed at similar or identical prices While time. and sales data permitted some trade reconstructions the absence of computerized data retrieval. systems made market surveillance efforts inefficient and prone to error. 2 1 1 Commodity Futures Trading Commission CFTC, Over 40 years later there is a far larger and significantly more sophisticated trading environment. World market capitalization stands at 65 6 trillion USD compared to 28 1 trillion USD only 14. years ago Methods of communicating trade information from turrets to electronic messages. enable people around the world to execute instantaneous transactions In some cases human. interaction is no longer required as with the use of sophisticated algorithmic and high frequency. trading programs The world economy has certainly evolved from shouting instructions and the. use of hand signals, innovative instruments is vital to the modern economy but with that evolution come new and. complex forms of illegal behavior Trade reconstruction has similarly evolved allowing regulators. to keep pace with modern challenges to market integrity Time stamped slips have been. See also 17 CFR 1 35 17 CFR 37 406 17 CFR 38 256 for related obligations. 40 Fed Reg 58660,Copyright 2018 NICE 4, The Complete Guide to Trade Reconstruction Compliance. modernized with computerized data but the concept behind the enforcement remains the same. creating an audit trail used to deter and detect market abuses. Section 731 of the Dodd Frank Act amended the Commodity Exchange Act CEA by inserting. Sections 4s f and 4s g which establish reporting recordkeeping and daily trading records. requirements for swap dealers and major swap participants Satisfaction of a CFTC inquiry. under Dodd Frank requires firms to maintain daily trading records of swaps including related. cash and forward transactions Execution records must include all swap terms trade tickets. unique swap identifier a record of the date and time of execution the name of the counterparty. the date and title of the agreement to which the swap is subject the product name of the swap. the price at which the swap was executed and related fees and commissions Post execution. information includes records of post execution processing and events including the confirmation. record of swap portfolio reconciliation and compression ledgers reflecting payments and interest. received moneys borrowed and loaned daily valuations daily calculations of current and future. exposure for each counterparty daily calculation of initial and variation margin collateral values. and charges aga, The requirements of CFTC Rule 1 35 go further and include an obligation to record all related. communications such as electronic mail instant messages and phone calls The Commission. reiterated in the Adopting Release that any conversation regardless of whether it occurs on a. firm provided or personal telephone must be recorded if the contents fall within the rule In. practice it can be difficult to record all oral communications concerning quotes solicitations. bids offers instructions trading and prices that lead to the execution of a transaction in a. commodity interest however that is just what modern law demands. The result of the various forms of data captured is the present day trade reconstruction To. sufficiently compile all the data necessary to recreate the life of a swap trade from pre trade to. execution and post trade firms require a solution designed to tag collect organize and export. data from a variety of siloed data archives Firms are all but obligated to implement robust. technologically solutions to remain compliant with trade reconstruction requests This is. consistent with other aspects of CFTC requirements for swap trades For example a clearing. member or DCO acting on their behalf is required to accept or reject each trade for clearing in. would be permitted so long as the process could operate within the same time frame as the. act as quickly as you would if you did automate Using analogous logic production of a fully. complete trade reconstruction is required within 72 hours of a request and most firms do not. have the infrastructure capable of manually compiling all the relevant data in that timeframe. te this process but in reality they must automate in order to. remain compliant with multiple requests and strict mandatory deadlines. The CFTC takes its mandate to protect market integrity very seriously especially when abuses. are identified upon investigation Firms are required to share in this responsibility and the. Commission uses trade reconstruction as a tool to enhance due diligence on swap dealers The. Copyright 2018 NICE 5, The Complete Guide to Trade Reconstruction Compliance. onus is placed on the firm to manage its own conduct and that of its employees As a result. the use of trade reconstruction will not be limited to reporting mandates The Business Conduct. Standards passed in 2012 impose duties upon swap dealers to among other things. 1 Establish risk management procedures, 2 Diligently supervise all partners members officers employees and agents. 3 Make available all required information in a timely manner and. 4 Prohibit any anti competitive activities, If history is any indication trade reconstruction will be the enforcement tool of the future Firms. can expect information contained within trade reconstructions to ensure not only compliance. accurate completion within the 72 hour timeframe is only the first step In order to achieve FULL. compliance firms will need trade reconstructions to guide their future operational and. organizational development as well,2 2 1 United Kingdom. For almost a century UK markets were largely self regulated dominated by the London Stock. Exchange LSE and conducted almost exclusively of limited types of securities denominated in. pounds sterling, In 1974 the LSE developed surveillance facilities designed to identify insider transactions It. established a surveillance team in 1981 Originally the program relied upon a stream of market. prices from jobbers or market makers on the trading floor The jobber acted as a principal. buying and selling securities for his own account and providing continuous two way prices for. the brokers who contacted him for quotes Suspicious price movements were manually. detected and referred to an investigation s manager if warranted If the movements seemed other. than a normal fluctuation the Stock Exchange Council3 would conduct a preliminary. investigation Preliminary investigations were in house inquiries where evidence was taken from. the firm However jobbers were notorious for leaving few written records making the program. inefficient Furthermore regulations at the time had no provision for the investigation of. suspicious price movements As a result it was difficult to obtain sufficient evidence to prove all. elements of insider dealing and most investigations were settled informally. To encourage greater international trade British securities markets went through a cycle of. economic liberalization and reregulation in the mid 1980s in a two part revolution In 1986 the. LSE deregulated in, government abolished fixed minimum commission rates and mandated separation of brokering. A committee which runs the London Stock Exchange and regulates members operations. Copyright 2018 NICE 6, The Complete Guide to Trade Reconstruction Compliance. and dealers trading for customers and for themselves Big Bang opened up the markets. allowing British banks to become full service financial institutions. Two weeks later Parliament adopted the Financial Services Act The Act signaled a dramatic. shift from self regulation to a more American style adversarial system Banks and insurers found. themselves under statutory regulation by the Bank of England and the Department of Trade and. Industry DTI respectively Steven Vogel once wrote that Big Bang day and the FSA. Shortly thereafter the Secretary of State for Trade and Industry implemented robust insider. trading provisions in the wake of several flagrant insider trading incidents The Big Bang resulted. in many technological developments and as a result the information gathered from the stock. market tape created greater market transparency The price volume and time of all equities. transactions were reported to the Stock Exchange within minutes of the transaction Prior to the. Big Bang trades were reported the following day and did not include the time of the transaction. This precursor to trade reconstruction proceeded to develop over the next few decades. Introduced in 2000 the Financial Services Authority FSA later renamed the Financial Conduct. Authority FCA oversees a statutory system for the regulation of investment business banking. and insurance in the UK Among other measures the FCA requires firms to have appropriate. systems in place to monitor that messages being sent or received are compliant. further expects firms to ensure they have appropriate systems and governance in place to self. report incidents of suspicious behavior in a timely fashion Beginning 2013 the FCA expected. regulated entities to demonstrate a full audit trail of decision taking and the rationale for these. in other words a trade reconstruction, In modern times financial stability is a key objective of the new regulatory regimes. objectives were altered by the Financial Services Act 2010 with an emphasis on financial stability. contributing to the protection and enhancement of stability in the UK financial system The FCA. continues to introduce more intrusive supervision including. own judgement concerning their business models strategy and product development. ent surveillance, effective real time and post trade monitoring which included. 1 Dedicated real time monitoring teams with detailed knowledge of control parameters. and expected client trading activity, 2 Controls with alerts in place to provide warning before control levels are breached. 3 Clearly defined procedures to ensure monitoring is performed in a time sensitive. manner and with suitable escalation and recording plans. Copyright 2018 NICE 7, The Complete Guide to Trade Reconstruction Compliance. Trade reconstruction will continue to play a large role in ensuring effective firm monitoring. protecting the UK financial system and strengthening the relationship between UK and EU. regulations, 2 2 2 European Securities and Markets Authority ESMA. Securities Regulation in the European Union has been substantially harmonized National. competent authorities collaborate in implementing EU directives and regulations like never before. There is no greater modern day example of this than MiFID II Arguably the broadest piece of. financial legislation ever to hit Europe MiFID II focuses on creating fairer safer and more efficient. markets The directive will create an unprecedented requirement of transparency and a. compliance with these objectives, In law recitals are a statement of facts that illustrate why a legal document in this case a. t t is necessary to impose an effective, Many factors go into determining best execution for example. firms may take into account,4 likelihood of execution and settlement. However other factors are highly subjective and require the knowledge and expertise of. seasoned professionals Those factors may include, 1 the characteristics of the client retail or professional. 2 the nature and details of the client order, 3 the particulars of the financial instruments subject to that order. 4 the proclivities of the execution venues to which that order can be directed. Best execution can often be considered as much art as science MiFID II understands the art. form and chose to include reference to it in the text Article 27 1 requires that. take all sufficient steps to obtain when executing orders the best possible result for their clients. taking into, those circumstances traders regulated under MiFID II will be required to substantiate their claim. never tell the full, story The elements of a trade reconstruction communications such as electronic mail instant. messages and recorded phone calls are vital to proving the narrative which includes all other. considerations relevant to the execution of the order Viewing trade data alone is incomplete. drafters fashioned the directive with this exact scenario in mind. Copyright 2018 NICE 8, The Complete Guide to Trade Reconstruction Compliance. It is well understood that MiFID II requires the capture of more communications than ever before. electronic communications relating to at least transactions concluded when dealing on own. account and the provision of client order services that relate to the reception transmission and. conclusion of such On its face this, section does not seem to apply to best execution principles However Recital 92 specifically. Lastly MiFID II and the Market Abuse Regulation MAR place a large emphasis on detecting and. preventing market a,recordings of voice, conversations and of electronic communications can assist National Competent Authorities. Capturing relevant, conversations and communications will enable NCAs to capture and deter more. The ESMA Consultation Paper highlights specific conversations and communications that should. be recorded in relation to investment services They are. i the receipt of an order from a client, ii the transmission of an order both where the investment firm will transmit the. order and where it will execute it, iii the conclusion of a transaction when executing orders on behalf of clients. iv the conclusion of a transaction when dealing on own account regardless of. whether a client is involved in the transaction, The items identified by ESMA are the very same elements that comprise a trade reconstruction. detect and prove the existence of, market abuse as well as verify compliance by firms with investor protection and other. In sum in order to demonstrate adherence to the best. execution requirements under MiFID II complete and accurate trade reconstructions will provide. vital if not obligatory evidence of compliance,2 2 3 Asia Pacific APAC. The Asian region does not have the long storied history of regulations that are found in the U S. and EMEA but recent initiatives have begun to implement many of the regulations found in other. parts of the world Dr Han Chen chief executive of Ceinex stated quite specifically. declared intentions to outl In October 2017 Guo Shuqing the. chairman of the China Banking Regulatory Commission CRBC made the statement to reporters. ESMA Consultation Paper 22 May 2014 ESMA 2014 549,MiFID II Recital 144. Michael McCaw China to model financial reforms on Mifid II Risk net Sept 13 2017. Copyright 2018 NICE 9, The Complete Guide to Trade Reconstruction Compliance. that financial regulations in China will be stricter in the future as regulators seek to control. financial risk and maintain stability The trend points towards stricter financial regulations strict. Additionally the Hong Kong Monetary Authority, HKMA continues to make great strides in improving enforcement and supervision Earlier this. year the HK, HMKA expects AIs to adopt a holistic and effective framework for fostering a sound culture within. erence of individual, According to the G 20 regulators should implement global standards to reform derivatives. that ensures a level playing field and avoids fragmentation of. markets protectionism and regulatory arbitrage The G 20 vision and the comments emerging. from China and Hong long indicate a large scale initiative towards the westernization and. standardization of financial regulations throughout the APAC region. 2 2 4 SYNOPSIS, achieve wealth or a goal The trading community is full of examples of attempted market abuse. and although they can make for good entertainment through cinema the reality is they can do. permanent damage to a firm s reputation and its bottom line To prevent this situation firms use. technology and policies as the main tools to combat market abuse Automated trade. reconstruction is a good example of ability to effectively manage risk and respond to. regulatory requirements utilizing technology, Dodd Frank implemented the 72 hour requirement for a reconstruction of a trade upon request. Firms responded by enlisting groups of compliance analysts to manually reconstruct a timeline of. events and communications that they have qualified as part of a trade This process which is far. from perfect proved adequate during the infancy of Dodd Frank The real challenge with the. manual process is the unknown did a firm capture all the data and communication with a trade. or perhaps did they capture too much unrelated data Time becomes the enemy Manual. processes can take hours or days to collect all pertinent data related to a trade The time and. energy spent in the collection phase leaves little leeway for review within the 72 hour deadline. The output often varies as well leaving regulators the role of sifting through different data. elements in a non uniform format and with no effective timeline to determine their relevance to a. trade Understandably the confidence level with any manual trade reconstruction is not great. leaving firms hoping for the best at the mercy of a regulator As Dodd Frank has matured. regulators increasingly tell firms their trade reconstruction process does not meet the necessary. standards for compliance leaving firms scrambling for alternative solutions. Automated trade reconstruction solves many of the challenges that come with manual processes. because it starts with effective data management Firms are pressed with the sheer quantity and. variety of data associated with trade activity A typical firm will manage trade data voice and. Hong Kong Monetary Authority Letter to The Chief Executive All Authorized Institutions Mar 2. Copyright 2018 NICE 10, The Complete Guide to Trade Reconstruction Compliance. email separately and under different leadership as an example This process although effective. in the capturing of data makes creating the trade reconstruction far more challenging The first. step in effective data management is the aggregation organization enrichment and indexing of. these different data types into a single system The available data should allow for correlation to. ensure that trade data records can be linked to related voice email or chat communications to. ensure the data can easily be recalled if a reconstruction proves necessary. With effective data management the role of the analyst changes Time spent on search and. collection of multiple data elements is reduced to a simplified search and retrieval utilizing a. central index of related data and the ability to correlate that data to reconstruct the time line of. events Now the analyst can find all potentially relevant data to a trade in minutes allowing far. more time for review to determine its relevance Under manual processes an analyst would need. to conduct multiple searches through multiple databases or make multiple requests to the data. owners for any data that may be or not be relevant The automated process of data. management and correlation,procedure that can be incorporated into a fi. Additionally the output format becomes significantly more advantageous When requests are. initiated by regulators presenting output in a timely fashion with an easy to understand layout. the law Through an, automated process the reconstruction can be reviewed and delivered in a uniform format. promptly thus providing the internal or external requestor with a clear consistent and accurate. timeline of events and communications Firms can be more confident the proper and complete. data is provided to regulators,3 The Role of Trade Reconstruction in Enforcement. Trade reconstruction is a tool used by regulators to subdue bad behavior It is prudent then to. understand the role of trade reconstructions in the various forms of market abuse As noted. above the elements that make up a trade reconstruction have been instrumental in. investigations In the hands of a regulator a trade reconstruction is a reactive construct. Understanding how trade reconstructions are used is just as important as knowing the. information contained within them,3 1 Insider Trading. Insider trading is arguably the most famous financial regulatory violation Movies like Wall Street. and The Wolf of Wall Street made antagonists like Gordon Gekko and Jordan Belfort household. names The reality of insider trading is far more sinister and destructive than the glamourous. Insider trading is the buying or selling of a security by someone who has access to material. nonpublic information about the security Illegal insider trading refers generally to buying or selling. a security in breach of a fiduciary duty or other relationship of trust and confidence while in. possession of material nonpublic information about the security. Copyright 2018 NICE 11, The Complete Guide to Trade Reconstruction Compliance. 3 1 1 United States, Historically the United States has more aggressively and successfully enforced insider trading. regulations than the European Union A violation can result in administrative and civil sanctions. and in some cases criminal prosecution In the U S insider trading actions can originate with the. SEC the Department of Justice or through private civil claims Each case requires the violation. of a fiduciary duty the highest standard of care under U S law. Examples of insider trading cases that have been brought by the SEC are cases against. Corporate officers directors and employees who traded the corporation s securities after. learning of significant confidential corporate developments. Friends business associates family members and other tippees of such officers. directors and employees who traded the securities after receiving such information. Employees of law banking brokerage and printing firms who were given such. information to provide services to the corporation whose securities they traded. Government employees who learned of such information because of their employment by. the government, One of the most famous cases to date is the 2011 conviction of Raj Rajaratnam former. managing partner of Galleon Management LP founder In late 2006 the Securities and. Exchange Commission began investigating Rajaratnam and the Galleon Group for insider trading. As part of this investigation the SEC obtained access to millions of pages of documents. conducted multiple interviews subpoenaed records and took sworn testimony from Rajaratnam. and others The SEC compiled multiple trade reconstructions based upon the written data. District Judge Richard Holwell wrote in his op a nalysis of the documentary evidence was. fairly sophisticated and while this revealed much circumstantial evidence of insider trading it also. confirmed what one would expect insider trading is typically conducted verbally Thus it seems. reasonably unlikely that additional documents would have produced qualitatively different. In March 2008 in order to obtain additional evidence the government sought a warrant to place. a wiretap on Rajaratnam s cellphone The wiretaps and the evidence gained from them helped. convict Rajaratnam and led to numerous guilty pleas from money managers traders. consultants lawyers and others associated with the insider trading charges in his case 9 The. judge cited the huge and brazen nature of the crime and imposed a 92 million civil penalty. U S District Judge Jed Rakoff was quoted as saying the crime cries out for the kind of civil. penalty that will deprive this defendant of a material part of his fortune. UNITED STATES OF AMERICA v RAJ RAJARATNAM and DANIELLE CHIESI United States. District Court SDNY 09 Cr 1184 RJH November 29 2010 24 25. Pamela Johnston Jaime Guerrero and Alexander Kramer Attacking Insider Trading and Other. White Collar Cases Built on Evidence From Government Wiretaps The Nuts and Bolts June 28. Copyright 2018 NICE 12, The Complete Guide to Trade Reconstruction Compliance. Most insider trading cases are uncovered by sophisticated computer systems that are employed. by the stock exchanges and by Self Regulatory Organizations tasked with monitoring trading. The computer systems constantly monitor volume and price movements of all publicly traded. stocks and generate alerts if an anomaly is detected As noted above evidence proving insider. trading is obtained through communication In the post Dodd Frank reality the burden of. creating complete and accurate trade reconstructions is placed upon the bank or firm making. the likelihood for successful regulatory investigations all the greater Suspicious calls or chats. social media postings or client emails must be identified complied and reviewed to determine if. firm employees are receiving or sharing material non public information Failure to do so will not. only result in greater regulatory scrutiny but may expose the firm to charges of failure to. 3 1 2 European Union, In the European Union insider trading or insider dealing has been regulated much more recently. than in the United States Under U S law no statute codifies the contours of the insider trading. prohibition of, forms the foundation of the prohibition against insider trading Under the parity of information. close it to the, investing public or must abstain from trading in or recommending the securities concerned. while such information remains undisclosed, This definition requires information of a precise nature that has not been made public relating. directly or indirectly to one or more securities Information is classified as price sensitive in the. sense that if made public it would likely have a significant effect on the price of the securities. Essentially MAD revolves around equal access to information. The EU and specifically UK regulators have been focusing especially hard on insider trading. recently with a number of high profile court cases and investigations Operation Tabernula Latin. a k a Nob of insider dealing The former received a sentence of four and a half years in prison. In areas of the EU in this case the UK the prosecution must establish that each person was a. knowing party to the offense That is incredibly difficult to do The eight year probe was originally. mounted by the old Financial Services Authority and continued by its successor the FCA 10 With. the introduction of robust recording requirements of MiFID II the use of complete trade. reconstructions as a regulatory tool will become the new normal throughout Europe. 3 2 Spoofing Layering and Front Running, Spoofing layering and front running are forms of market manipulation whereby a trader uses. different trading tactics to capitalize on a leading event in the marketplace. Caroline Binham Insider trading case highlights the challenges facing prosecutors Financial. Times available at https www ft com content ddb82d9e 1686 11e6 9d98 00386a18e39d. Copyright 2018 NICE 13, The Complete Guide to Trade Reconstruction Compliance. Some regulators use the terms spoofing and layering interchangeably since each method uses. visible non bona fide orders to deceive other traders on the supply or demand in the market. FINRA defines layering as entering multiple non bona fide orders at multiple price tiers whereas. spoofing requires the entering of one or more non bona fide orders at the top of the order book. In spoofing patterns a trader enters a single visible order or a series of visible orders that either. creates a new best bid or offer or adds significantly to the liquidity displayed at the existing best. bid or offer During the lifespan of that first order s or within a short time after it is cancelled the. same trader executes a trade on the opposite side of the market The pattern is manipulative. because the execution occurs at a more favorable price than the trader was likely to obtain in the. absence of the first order s This is true regardless of whether the buy sell execution occurs at. the pre sequence best bid offer price at the midpoint or at the new best offer bid price set by. the spoof order In any of those scenarios the trade is executed at price better than if the trader. had hit the pre spoof bid or had taken the pre spoof offer The following diagram illustrates this. with a specific example,Copyright 2018 NICE 14, The Complete Guide to Trade Reconstruction Compliance. Spoofer offers to SELL a large contract,Other Sellers offer to join him at that. price thinking that the current selling,price of 45 05 is going down. Spoofer cancels his SELL order and,simultaneously BUYS at 45 03. Buyers Sellers,Market price for Market price for,buying all contracts selling all contracts. 45 00 45 01 45 02 45 03 45 04 45 05, Layering is a variant of spoofing where the trader enters multiple visible orders on one side of the. market at multiple price tiers which causes the midpoint of the spread to move away from those. multiple orders and the same trader executes a trade on the opposite side of the market The. execution occurs at a more favorable price than the trader was likely to obtain in the absence of. the first orders, The mere cancellation of trades is not spoofing and is not illegal Many legitimate client driven. trades can involve large numbers of cancellations For example an institutional or retail client. may direct market makers to cancel the bulk of their orders after missing the National Best Bid. and Offer NBBO The NBBO system may not reflect the most up to date data which means. investors may not get the prices they were anticipating when the trades are actually requested. The ability to cancel trades when new instructions arrive is crucial to supply liquidity competitively. to the benefit of investors Canceling trades after receipt of client instructions allows market. makers to submit more aggressive quotes and effectively preform their function of providing. liquidity to the market, It can be incredibly difficult to determine the intent behind cancellations Using solely high. cancellation rates as the primary means for identifying spoofers runs the very serious risk of.
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