Half of Futures Trades in Chicago Are Illegal Wash Trades

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Half of Futures Trades in Chicago Are Illegal Wash Trades

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By Pam Martens: July 24, 2014
Obrázok
Terrence Duffy of the CME Group Testifying Before the Senate on May 13, 2014

Since March 30 of this year when bestselling author, Michael Lewis, appeared on 60 Minutes to explain the findings of his latest book, Flash Boys, as “stock market’s rigged,” America has been learning some very uncomfortable truths about the tilted playing field against the public stock investor.

Throughout this time, no one has been more adamant than Terrence (Terry) Duffy, the Executive Chairman and President of the CME Group, which operates the largest futures exchange in the world in Chicago, that the charges made by Lewis about the stock market have nothing to do with his market. The futures markets are pristine, according to testimony Duffy gave before the U.S. Senate Agriculture Committee on May 13.

On Tuesday of this week, Duffy’s credibility and the honesty of the futures exchanges he runs came into serious question when lawyers for three traders filed a Second Amended Complaint in Federal Court against Duffy, the Chicago Mercantile Exchange, the Chicago Board of Trade and other individuals involved in leadership roles at the CME Group.

The conduct alleged in the lawsuit, backed by very specific examples, reads more like an organized crime rap sheet than the conduct of what is thought by the public to be a highly regulated futures exchange in the U.S.

The lawyers for the traders begin, correctly, by informing the court of the “vital public function” that is supposed to be played by these exchanges in “providing price discovery and risk transfer.” They then methodically show how that public purpose has been disfigured beyond recognition through secret deals and “clandestine” side agreements made with the knowledge of Duffy and his management team.

The most stunning allegation in the lawsuit is that an estimated 50 percent of all trading on the Chicago Mercantile Exchange is derived from illegal wash trades.

Wash trades were a practice by the Wall Street pool operators that rigged the late 1920s stock market, leading to the great stock market crash from 1929 through 1932 and the Great Depression. Wash trades occur when the same beneficial owner is both the buyer and the seller. Wash trades are banned under United States law because they can falsely suggest volume and price movement.

The lawsuit says Duffy and his management team are tolerating wash trades “because they comprise by some estimates fifty percent of the Exchange Defendants’ total trading volume and also because HFT transactions account for up to thirty percent of the CME Group’s revenue.”

The complaint indicates that the plaintiffs have a “Confidential Witness A,” a high frequency trader, who has given them a statement that wash trades are used by high frequency traders as part of a regular strategy to detect market direction and “to exit adverse trades when the market goes against their positions.”

The strategy works like this, according to the complaint:

“HFTs [high frequency traders] continuously place small bids and offers (called bait) at the back of order queues to gain directional clues. If the bait orders are hit, the algorithm will place follow-up orders to either accumulate favorable positions or exit ‘toxic’ risks, a process which leverages bait orders to gain valuable directional clues as to which way the market will likely move. The initial bait orders are very small while subsequent orders, once market direction has been identified, are very large. A portion of the large orders that follow the smaller bait orders are wash trades.”

Another very serious charge is that some of the defendants in the lawsuit who are in leadership roles in management at the futures exchanges, have “equity interests” in the very high frequency trading firms that are benefitting from these wash trades. The complaint states:

“The Exchange Defendants profit from the occurrence of wash trades and have a vested interest in not having more robust safeguards against them because they contribute significantly to the Exchange Defendants’ volume numbers and revenue. Were the volume of wash trades excluded from the Exchange Defendants’ volume and revenue numbers, the radically reduced volume numbers would exert adverse pressure on the CME Group’s stock price, not to mention the revenue to members of CME Group’s governance who have equity interests in participating HFTs in addition to stock ownership in the CME Group, Inc.”

In addition to wash trades, the lawsuit charges that the CME Group has entered into “clandestine” incentive agreements.

“Defendants have entered into clandestine incentive/rebate agreements in established and heavily traded contract markets with favored firms such as DRW Trading Group and Allston Trading, paying up to $750,000.00 per month in one of the most heavily traded futures contracts in the world. At no time during the Class Period have Defendants voluntarily revealed to the trading public that these material agreements exist in established markets. Defendants through their lawyers have repeatedly ridiculed the suggestion that clandestine agreements exist.”

The complaint identifies another “Confidential Witness B” who has provided information on “the existence of a clandestine rebate agreement between the CME and a very large volume HFT firm that trades in the S&P500 E-Mini contract.” That’s a stunning allegation since the S&P500 E-Mini was thought to be one of the most liquid contracts in the U.S. The complaint correctly notes that “there can be no economically justified reason, such as to develop thinly traded markets, that would justify the CME and CME Group to maintain clandestine incentive agreements in this particular market, other than the improper intent.”

Another trick to get an early peek at trading information is referred to in the complaint as the “Latency Loophole,” which “allows certain market participants to know that orders they entered were executed and at what price, and to enter many subsequent orders, all before the rest of the market participants found out the status of their own initial orders.”

The complaint explains that the ability to continuously enter orders and get trade confirmations “of the price at which these orders are filled, before the rest of the public even knows about the executed trades,” empowers high frequency traders with “a massive informational and time advantage in discerning actual price, market direction and order flow before anyone else.”

By providing just a select group of market participants and high frequency traders with this “sneak peek” advantage, says the complaint, the defendants engaged in a “fraud on the marketplace.”

The Justice Department and FBI have opened investigations into high frequency trading. Let’s hope that includes both stock and futures exchanges.

The traders bringing the lawsuit, which is filed as a class action, are William Charles Braman, Mark Mendelson and John Simms. Lawyers for the plaintiffs are R. Tamara de Silva, who maintains a private practice, and lawyers from O’Rourke & Moody.

The suit was filed in the U.S. District Court for the Northern District of Illinois. The Civil Docket for the case is #: 1:14-cv-02646 and has been assigned to Judge Charles P. Kocoras. The CME Group is represented by the law firm Skadden, Arps, Slate, Meagher & Flom, LLP.

ZDROJ: http://wallstreetonparade.com/2014/07/l ... sh-trades/
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Re: Half of Futures Trades in Chicago Are Illegal Wash Trade

Príspevok od používateľa Rokosák »

Priatelia, dalsi dovod sa vyvarovat komoditam ci uz kotovanym na burzach, elektronicky, alebo cez sukromne schemy dealerov. Kvoli takym a podobnym praktikam doporucujem kazdemu, aby od komodit utekal co najdalej. Vasa sanca uspechu je ako srnke vo svorke vlkov.
Neodvratné sa stáva zriedkavo, neočakávané často.
MartinUS
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Re: Half of Futures Trades in Chicago Are Illegal Wash Trade

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Rokosak, rikal jste, ze jste z financni branze? Vite vubec, co se deje na FX trhu s regulaci?, zda treba take traderi nezaluji NYSE a dalsi akciove burzy? :http://blogs.marketwatch.com/capitolrep ... y-trading/

To, ze se nekdo chce prizivit na burze, ze vyvola spor znamena podle vas, ze ma pravdu? :) Velke firmy v US mivaji desitky, ne-li stovky zalob za rok...Muzete si by jisty, ze burzy oproti OTC trhum jsou velmi velmi dobre regulovany a to nejbezpecnejsi, co pro investory existuje :wink:
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Re: Half of Futures Trades in Chicago Are Illegal Wash Trade

Príspevok od používateľa Rokosák »

Osobne som zazil ako komoditny priemysel zozral skusenych spekulantov a hedgerov a ako bezni smrtelnici prisli o zivotne uspory. Takisto ako insideri falsovali obchody.

Pre bezneho neodbornika je riskovat svoje peniaze statisticky nevyhodne. Investovanie do akcii je menej nebezpecne, pretoze paky su kratsie a iba u shortoch mozes stratit viac ako celu investiciu. V komoditach aj pri kupe.
Neodvratné sa stáva zriedkavo, neočakávané často.
MartinUS
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Re: Half of Futures Trades in Chicago Are Illegal Wash Trade

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Kdo to jsou zkuseni spekulanti koho jste znal :)? Na komoditach je obecne znamo, ze jsou ti z nejlepsich obchodniku at jiz v bankach a nebo jednotlivci jako zelvy, Bill Eckhardt, John Henry, Winton a dalsi... U komodit se obchoduje trochu jinak nez u akcii a vzdy je nutny stop loss z duvodu paky, proto je definovan interval max. ztraty...Pokud nektery z vasich "zkusenych spekulantu" neobchoduje se sl, tak neni zkuseny, ale je nezkuseny. Rizeni pozice je velice dobre, jelikoz trh je v podstate temer 24 hod. s mensimi prestavkami. Na akciich je taky paka pokud na margin a ne, ze jenom muzete prijit o vice nez investujete...akcie muze jit do 0 a byt vyrazena z trhu, dojit k spin-off a dalsi veci (delal jsem akcioveho a opcniho tradera v jednom z nejvetsich akciovych brokeru na svete...takze, to co pisete je nesmysl totalni, ze jedno je rizikovejsi a druhe ne...). U akcii...navic si vezmete nazor Buffeta, ktery vubec nedoporucuje kupovat beznym lidem akcie, ale index, protoze bezni lide maji velmi omezene moznosti zjistit, co se vubec ve firme jako takove deje oproti activist innvestors, apod. Na akciich muze otevrit pozice s vyraznym gapem (trh nebezi 24 hod., dojde k vyjimecne zprave, atd.) a stop loss vam nemusi byt vubec platny, atd., atd...Tj. pozor a dukladne se tim zabyvat vsim a ne jen obecne...
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Re: Half of Futures Trades in Chicago Are Illegal Wash Trade

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Rokosak: Ake riziko podstupujem, ked mam ucet velkosti 100 000 $ a kupim 1 kontrakt ES v nominalnej hodnote toho casu 98 000 $ oproti beznemu akciovemu obchodnikovi, ktory nakupi akcie v hodnote 100000$ dolarov bez paky?
Pozor, tu sa uz bavis s ludmi, co uz maju odkrutene roky na burze, tak pouzi argumenty adekvatne nasim skusenostiam... :)
Naposledy upravil/-a jogo v St 30 07, 2014 6:03 pm, upravené celkom 1 krát.
-Disclaimer: Všetky informácie, ktoré poskytujem na tomto fóre, sú určené výhradne ku študijným účelom. V žiadnom prípade neslúžia ako investičné doporučenie.
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Re: Half of Futures Trades in Chicago Are Illegal Wash Trade

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Samozrejme se jedna o pakovy efekt a takto obchoduje vetsina hedge fondu (a bank, staci se podivat na podrozvahove polozky, atd.). Dulezite je rizeni rizika ve smyslu risk/ reward v ramci denniho rozpeti u intraday, nekolika dni,mesicu u swing/ trenfllowing, apod. a nastaveni patricny bracketu s trailing stopy, apod. To je klasicka praktika a v historii na risk adjusted bazi uspesnejsi nez buy/ hold...

Ja samozrejme chapu, ze se bavim s odborniky...presto bych si dovolil tvrdit, ze pri srovnani s tradery/ investoruy napr. v US jsou zkusenosti a znalosti lidi v CR/SK na minimalni urovni a financni gramotnost je smutne nizka :( Proto rad vzdy napisu clanek, apod., aby se to posunulo kupredu...
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Re: Half of Futures Trades in Chicago Are Illegal Wash Trade

Príspevok od používateľa rabdo »

MartinUS napísal:Ja samozrejme chapu, ze se bavim s odborniky...presto bych si dovolil tvrdit, ze pri srovnani s tradery/ investoruy napr. v US jsou zkusenosti a znalosti lidi v CR/SK na minimalni urovni a financni gramotnost je smutne nizka Proto rad vzdy napisu clanek, apod., aby se to posunulo kupredu...
máš pravdu...

neprestávaj komunikovať 8)
Charles Bukowski " svet patrí tým čo sa neposerú "
MartinUS
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Re: Half of Futures Trades in Chicago Are Illegal Wash Trade

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To ukaze budoucnost :) Ale urcite vezme CR/SK prvenstvi ve financnim prumyslu kontinentalni Evropy Svycarsku...otazka casu :)
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Re: Half of Futures Trades in Chicago Are Illegal Wash Trade

Príspevok od používateľa Rokosák »

Jogo, v Tvojom konkretnom pripade nie je ziaden rozdiel. Rozdiel je, ze za 100,000 mas vacsie moznosti paky vo futuritach ako v akciach a teda aj moznost vyssieho rizika. Zial tuto moznost si spekulanti vo futuritach vyuzivaju a vysledkom je, ze az 90% je stratovych. V akciach je to cislo podstatne nizsie I ked maskovane inflaciou.
Neodvratné sa stáva zriedkavo, neočakávané často.
MartinUS
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Re: Half of Futures Trades in Chicago Are Illegal Wash Trade

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Rokosak, porad si to vysvetlujete po svem, jako v nejake stare skole...dnes se obchoduje jinak nez buy/ hold a s jinym money managementem. Ty cisla jsou "vycucane z prstu",o tom bych asi jako nekdo, kdo videl tisice uctu v realu musel neco vedet :)
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Re: Half of Futures Trades in Chicago Are Illegal Wash Trade

Príspevok od používateľa Rokosák »

Ludia z priemyslu uz aspon pol storocia neobchoduju sposobom BUY/HOLD. Ale co amateri?
Neodvratné sa stáva zriedkavo, neočakávané často.
MartinUS
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Re: Half of Futures Trades in Chicago Are Illegal Wash Trade

Príspevok od používateľa MartinUS »

Amateri bud maji projit dukladnym skolenim, nebo pokud nemaji skoleni...neobchodovat vubec a predat profesionalum s licenci (ne pochybnym subjektum). Ja se obavam, ze jak ted trhy rostly, tak nakupuji akcie a bohuzel prijde zase propad pres 50% a bude vymalovano a spousta lidi ztrati obrovske penize, protoze lide maji kratkou pamet a mysli si, ze kdyz roste, tak bude stale...v realite a financni vedecka literatura to potvrzuje...bud nevydelaji skoro nic nebo ztrati. To znamena velky pozor na buy/ hold necemu, cemu se dukladne, ale dukladne nerozumi...
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Re: Half of Futures Trades in Chicago Are Illegal Wash Trade

Príspevok od používateľa Rokosák »

Vobec neobchodovat je aj moje odporucenie. Skolenie nestaci, treba aj prax. Najskor bez risku vlastnych penazi. To sa da iba pracou v komoditnom priemysle. Ziadna prax ani studium vsak neposkytne schopnost vidiet do buducnosti.

Mozno som neskromny, ale ja do tej buducnosti vidim. Vidim sialencov z vychodnej europy zozratych komoditnym priemyslom ako srny svorkou vlkov. Cest srnam, ktore im ujdu. Pre ostatnych je moje heslo dna: nechodte tam, SU TAM VLCI.
Neodvratné sa stáva zriedkavo, neočakávané často.
MartinUS
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Re: Half of Futures Trades in Chicago Are Illegal Wash Trade

Príspevok od používateľa MartinUS »

Zadni vlci tam nejsou, to spise se vyrojilo hodne podivnych fx fiem na v podstate neregulovanem trhu. Na zapade je trh regulovan az az a vse je naprosto transparentni a centralizovane na burze. Kdo obchoduje s hlavou a mapatricny money management ci primo zabudovano v AOS rozhodne se jedna o velmi zajimavy business a pro nektere tradery velmi velmi uspesny vas muzu ujistit. Takze vlka si muzete akorat pustit jako film, je to hovadina, mate to cele pomotane :) Vlk v tom filu obchodoval naopak akcie na neregulovanem v podstate (pink sheets) trhu...
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