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High-Speed Traders Find CME Loophole

posted on May 3, 2013

: For a few minutes last week, a mere 12 words on Twitter shook the world's mightiest stock exchange to its core.

Hackers sent a false Associated Press tweet reporting President Obama had been injured by an explosion at the White House. Computers with sophisticated algorithms reacted to the bogus report and immediately began dumping stocks. And in less than five minutes the computers unloaded $134 billion worth of equity on Wall Street.

Markets quickly recovered from Tuesday's plunge. But the incident drew attention to the potential danger of high frequency trading.

Those concerns were evident again this week in an article in the nation’s leading financial newspaper. But this time, the Wall Street Journal alleged high-speed traders are exploiting vulnerabilities in the world’s dominant agricultural futures exchange giving the computers an advantage over other traders.

When the Chicago Board of Trade opened more than 150 years ago the only way to make a trade was through open outcry.

In the past 3 decades, however, electronic trading has begun to take over for those shouting at the top of their lungs.

After numerous mergers and acquisitions, the Chicago Mercantile Exchange has become the world's largest futures exchange company and executed 11.6 million contracts per day in April.

Late this week, however, the Wall Street Journal reported that gaps in information timing could benefit some traders. The newspaper said high-speed traders are using a hidden facet of the Chicago Mercantile Exchange's computer system to trade on the direction of the futures market before other investors get the same information.

The report, based on information from unnamed people familiar with the matter and reviews of trading records by The Wall Street Journal, found that the advantage often is just one to 10 milliseconds. But it’s enough time for computer-driven commodity traders to detect when their orders have been executed allowing them time to take further action before the rest of the market can detect any changes.

The Tabb Group, a financial market research and strategic advisory firm, says open outcry exchanges have lost 20 percent of their business to the computer trades. And according to its findings, high frequency trading accounts for more than 60 percent of futures-market volume, up from 47 percent in 2008.

This week, CME officials said, “Our goal is to bring variability as close to zero as possible and we have made significant steps to address latencies related to trade confirmations.”

The company also stated, “Out of the more than 300 million messages that come into our platform each day, there may be times when customers can experience a latency of a few milliseconds between the time they receive their trade confirmations and when that information is accessible on the public feed.  However, these instances are not consistent and vary across asset classes.”



Tags: #mtom CME Group commodity trading computer trading futures trading high-speed trade