On November 19, the CME Group Exchanges issued Market Regulation Advisory Notice RA0913-5R regarding the prohibition on wash trades. The Advisory Notice defines a “wash trade” as “a form of fictitious trade in which a transaction or a series of transactions give the appearance that bona fide purchases and sales have been made, but where the trades have been entered into without the intent to take a bona fide market position or without the intent to execute bona fide transactions subject to market risk or price competition.”

The Advisory Notice notes that intent may be inferred from evidence of prearrangement or evidence that trades were structured, entered or executed in a manner that the parties knew or should have known would result in a wash trade. The Advisory Notice places a duty on market participants, including account executives and floor brokers, to inquire about the propriety of  simultaneous buy and sell orders that they receive for execution. Participants must monitor trading and minimize the potential for and occurrence of wash results.

With regard to transactions on Globex, the Advisory Notice states that there is a significant potential for regulatory exposure when trades self-match and, while unintended and incidental buy and sell order matching is generally not considered a wash trade, any self-matching on a more than incidental basis in the context of the trader, trading group or algorithm’s activity may be considered a wash trade that violates exchange rules. The Advisory also discusses more specific situations that further address the extent of wash trade rules for firms with independent proprietary traders and certain types of trades.

CME Group Exchanges provide a voluntary Self-Match Prevention (SMP) functionality that can be employed  to block the matching of buy and sell orders  that are submitted to Globex with the same SMP ID in the order message and within the same Executing Firm. While utilizing the SMP functionality is not mandatory, the Advisory Notice encourages market participants to review their operations and the Advisory Notice and, where appropriate, take steps to minimize the potential for wash trades through the use of SMP functionality or by alternative means.

The Advisory Notice is available here.