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HFT spat to be arbitrated by CME

First Published 1st September 2014

HTG Capital makes allegation that rival Allston Trading is spoofing in an arbitration case filed with CME. AT takes a look at reactions to the news.

According to a Bloomberg article, HTG Capital Partners said it detected trading patterns by Allston Trading indicative of spoofing, a banned manipulative practice characterised by rapidly placed orders to create the appearance of demand followed by cancellations.

One Chicago-based algo trader told Automated Trader that the first impression is - how can HTG possibly know this?

The question arises because CME is counterparty to all transactions.

"CME feeds don't identify counterparties. Without non-public information, it'd be incredibly difficult to be able to point the finger at a specific firm," the trader added.

It isn't clear the level of detail in HTG's complaint, but according to an inside source quoted by Bloomberg, HTG suspects a software update implemented last year by the CME may be used in some spoof trades. The system, known as self-match prevention, keeps firms from trading with themselves. Improper use of CME's self-match prevention system may constitute a violation of exchange rules.

In a blog posting on the Sang Lucci website, electronic trading expert Ezra Rapoport said: "My read is that HTG is tattling to CME on Allston. HTG has tipped their hand, however, as anyone who trades on CME knows that the exchange itself is counterparty to all transactions. Therefore, HTG could not possibly - through any aboveboard means - know that Allston is responsible for the allegedly manipulative quoting behavior.

"My take is that HTG just hired a desk of former Allston traders who are blaming their poor performance on market behaviors they identify as coming from their former shop. So, HTG, I hope you're prepared for mommy CME to ask you: how do you know that Allston was taking cookies from the cookie jar (weren't you supposed to be in bed)?"

Financial news and blogging site Zerohedge tweeted: "ALLSTON ACCUSED BY HFT RIVAL OF MANIPULATIVE TRADING ON CME. You mean manipulative providing of liquidity right?"

Themis Trading's Joe Saluzzi tweeted: "Starting to turn on each other now."

Disputes between rivals can get quite heated even as super speed trading becomes more prevalent across asset classes. Last year in currency markets, hedge fund GSA Capital Partners accused Thomson Reuters of being too lenient in sanctioning Lucid Markets. Lucid was briefly suspended for breaking trading rules by hooking up several servers to its platform at once, and obtaining vital trading data just ahead of its competitors.