Regulatory

Wash Trades | Your Questions Answered

We’ve been getting a TON of questions about our Wash Trade blog post.

Wash Trades Surveillance
Wash Trades FYI

What do you mean when you say my traders are trading as the FCM?
Let’s Say my company is ABC Energy. I have 100 Traders and an FCM called FCMBANK. When my traders execute trades via a trading platform like TT or even the exchange’s own platform there is a strong probability that my traders are executing as the FCM.

What happened was that when FCMBANK originally set us up, we took a shortcut and connected to the exchange using FCMBANK’s credentials rather than getting our own. This means that when one of my traders executes a trade, the exchange sees FCMBANK making the trade not ABC Energy.

From a position perspective its not a big deal because FCMBANK sees that my traders executed some trades in their name. They allocate those trades back to my account later in the day. The problem is that ABC Energy has zero visibility as to what our traders are doing on the market.

This causes problems:

Because my traders are executing as FCMBank, the trades are unlikely to flow directly into my ABC Energy trading system. Its a setup for confusion, because as ABC Energy I can’t see what my traders are doing on the exchange at all. Forget keeping real time track of position limits, wash trades, spoof, slamming etc…
But they are solvable:

We set up limits & surveillance monitoring all the time. The very first thing we do on a project is reset accounts from the FCM to the client to ensure that trades are executed in the name of the firm not the FCM.
Sometimes My Traders Execute Block Trades via Voice Broker, What Then?

There’s a trick to this. When a broker receives a voice order there is an exchange screen they can use to immediately allocate it back to ABC Energy. Here’s the thing: They have to do it right away. The trader has to tell them to either execute it in our name or allocate it immediately. If the broker delays we are just not going to automatically see the trade. We’ve seen an increasing number of clients put brokers into the penalty box for delayed allocation.

Wait, I Can Get a Direct Feed of My Traders Orders?

Yes…mostly. The large exchanges have a number of different means to get order information, varying in complexity. I’d say that we are somewhat still early days in terms of getting traders real time order information. Some exchanges it’s quite simple…others…more challenging.

Are the rules for wash trades the same in the E.U. as they are in the US?

Very Similar,

CFTC,“Entering into, or purporting to enter into, transactions to give the appearance that purchases and sales have been made, without incurring market risk or changing the trader’s market position. “

vs.

ESMA, “…entering into arrangements for the sale or purchase of a financial instrument where there is no change in beneficial interests or market risk or where the transfer of beneficial interest or market risk is only between parties who are acting in concert or collusion.”

I’m a broker do I need to check my client’s orders before I execute?

FCMs need to be really cautious that they are not getting caught up in a wash scheme. via the CME:

“The CFTC has held that firms, firm employees and floor brokers may be found to have knowingly engaged in wash trades if they facilitate a wash result without having made sufficient inquiry as to the propriety of such orders prior to their execution. The failure of a firm employee or floor broker to undertake such inquiry may support an inference of knowing participation in wash trades.”

We’ve built surveillance internally, but we’d like to get some external validation about our Limits, Wash, and other results.

Not a problem. We would be happy to run your data through K3. Or, if you prefer you can engage one of our consulting partners that use K3 for that very purpose. Feel free to give Tom Eisner a call and he will set it up.

Email: tje@broadpeakpartners.com