[Federal Register Volume 60, Number 226 (Friday, November 24, 1995)]
[Notices]
[Pages 58047-58048]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-28700]
=======================================================================
-----------------------------------------------------------------------
COMMODITY FUTURES TRADING COMMISSION
Advisory; Customer Orders
AGENCY: Commodity Futures Trading Commission.
ACTION: Advisory.
-----------------------------------------------------------------------
SUMMARY: The Commodity Futures Trading Commission (``Commission'') is
issuing an Advisory concerning customer orders transmitted to and
reported from exchange trading pits in an extremely rapid manner. The
purpose of this Advisory is to inform the exchanges that, for such
orders, an exchange will be deemed to have demonstrated good faith
towards meeting the objectives of Section 5a(b)(3) of the Commodity
Exchange Act (``Act''), provided that certain recordkeeping and
enforcement provisions are met.
DATES: The Advisory is to be effective January 23, 1996.
FOR FURTHER INFORMATION CONTACT:
De' Ana H. Dow, Special Counsel, or Rachel F. Berdansky, Attorney/
Advisor, Division of Trading and Markets, Commodity Futures Trading
Commission, 2033 K Street, N.W., Washington, D.C. 20581. Telephone:
(202) 418-5490.
SUPPLEMENTARY INFORMATION:
I. Introduction
The Commission is hereby issuing guidance concerning all customer
orders that are transmitted to and reported from the trading pit in an
extremely rapid manner through hand signals or verbally (``flashed
orders''). An exchange must satisfy the standards set forth in this
Advisory to demonstrate compliance with Commission Regulation 1.35(a-
1)(2)(i) and 1.35(a-1)(4), as well as good faith compliance with
Section 5a(b)(3).
Commission Regulation 1.35(a-1)(2) (i) and 1.35(a-1)(4) provides
that order tickets, among other things, must be timed upon receipt on
the trading floor (``entry time'') and when the execution price is
reported from the floor (``exit time''). Section 5a(b)(3) of the Act
sets forth heightened audit trail standards, including a heightened
audit trail for customer orders. The enhanced standards go into effect
in October 1995, in accordance with the terms thereof.
The Commission has taken several steps with respect to
implementation of Section 5a(b)(3) of the Act. Specifically, the
Commission issued a Report to Congress on Futures Exchange Audit Trails
that assessed the progress of each exchange in complying with current
and future audit trail requirements, and
[[Page 58048]]
stated that improvements to existing audit trail systems could
demonstrate good faith efforts to comply with enhanced audit trail
requirements. The Commission also has completed comprehensive testing
on four large exchanges to determine, among other things, the status of
their audit trails towards meeting the enhanced trade timing and
sequencing standards. Based on the test results, each of those
exchanges has been informed as to the specific actions that would be
needed to demonstrate good faith towards meeting Section 5a(b)(3). In
addition, the Commission evaluates exchange systems on a routine basis
when conducting rule enforcement reviews. As mandated by Section
5a(b)(5)(A)(i) of the Act, the Commission is in the process of
exempting from the requirements of Section 5a(b)(3), small exchanges
that have effective trade monitoring systems.
This Advisory on flashed orders is a further step towards achieving
exchange compliance with existing statutory and regulatory
requirements. The Commission is concerned that the exchanges sometimes
are not adequately enforcing the requirements with respect to flashed
orders. Among other things, Commission staff has identified instances
in which an entry timestamp apparently was recorded after an order was
flashed, resulting in an inconsistency between the order ticket
timestamp and the pertinent time and sales print. Such action is a
direct violation of Commission Regulation 1.35(a-1)(2)(i), which
specifically requires that an entry timestamp be recorded on an order
ticket before the order is flashed to a broker.
II. Current Flashed Order Practices
The Commission has observed that the precise mechanics involved in
flashing orders vary from firm to firm and exchange to exchange. For
example, in Chicago, where flashing is most common, flashed orders
usually are transmitted to the floor broker by hand-signal.\1\ In New
York, most flashed orders are transmitted through verbal communication.
There is also some variation in how exchanges define flashed orders.
Specifically, one exchange considers all orders hand-signalled into a
trading pit to be flashed orders, while another exchange considers only
those orders that are hand-signalled into the trading pit immediately
upon receipt at the trading desk to be flashed orders. Further, not all
exchanges currently have recordkeeping procedures to distinguish
flashed orders from other paper orders for audit trail purposes.
\1\ Flashing is most prevalent in the Chicago financial markets
because of the need for instantaneous trade execution. Trading in
the financial markets on the Chicago exchanges comprises 67 percent
of all trading volume in the United States and 49 percent of all
world volume. The CBT has stated that nearly 100 percent of the
customer orders executed in its financial markets are flashed to the
broker. Similarly, the CME estimates that 80-100 percent of the
customer orders in its interest rate markets and 60-80 percent of
customer orders in its currency markets are flashed.
---------------------------------------------------------------------------
In the recent notification by the Commission to the CBT and CME
concerning the audit trail test results, the Commission recommended,
among other things, that each Exchange require a trade submission
indicator for flashed orders. Both Exchanges now require clearing firms
to enter a special indicator into the clearing system for flashed
orders. The Commission also recommended that the Exchanges aggressively
enforce timestamping procedures for flashed orders. The Commission has
not made similar recordkeeping or enforcement recommendations for the
New York exchanges, where flashed orders are much less common. However,
because of the Commission's concern that the exchanges are not always
rigorously enforcing existing timestamp requirements for flashed
orders, the Commission is setting forth in this Advisory its
interpretation of relevant audit trail requirements and its
expectations for all exchanges subject to Section 5a(b)(3) of the Act.
III. Standards for Flashed Orders to Comply With the Objectives of
Section 5a(b)(3) of the Act
Any exchange subject to Section 5a(b)(3) of the Act, seeking to
have its audit trail deemed in good faith compliance with Section
5a(b)(3), must assure compliance with the following standards:
(1) In accordance with Commission Regulation 1.35(a-1)(2)(i), an
entry timestamp must be recorded on an order ticket before an order is
flashed into a trading pit.
(2) In accordance with Commission regulation 1.35(a-1)(4), upon
report of an order fill from the trading pit, an exit timestamp must be
immediately recorded on the corresponding order ticket.
(3) Each flashed order must be identified as a flashed order on the
corresponding order ticket. Identification of these orders will
distinguish them from other paper orders and improve the audit trail
for flashed orders.\2\
\2\ The Commission believes that identification of flashed
orders on the trade register required under Commission Regulation
1.35(e) would further enhance the audit trail and exchange trade
surveillance, and thus, should be a goal of all exchanges subject to
Section 5a(b)(3) of the Act.
---------------------------------------------------------------------------
(4) Maintain effective surveillance and enforcement procedures,
including without limitation, floor surveillance, periodic review of
trading documents, and disciplinary action as necessary.
(5) Order tickets must accurately reflect the customer's
instructions when received, including whether the order is a market or
price order.
Dated: November 16, 1995.
By the Commission:
Jean A. Webb,
Secretary to the Commission.
[FR Doc. 95-28700 Filed 11-22-95; 8:45 am]
BILLING CODE 6351-01-M