On August 28, 2014, the Chicago Mercantile Exchange Inc., the Board of Trade of the City of Chicago Inc., the New York Mercantile Exchange Inc. and the Commodity Exchange Inc. (collectively, the “Exchanges”) announced that they were going to adopt new Rule 575, called Disruptive Practices Prohibited. Rule 575 was implemented on September 15, 2014. While the new Rule 575 merely codifies the Exchanges’ existing rules, the new rule illustrates exactly what the Exchanges view as constituting disruptive order entry and trading practices. The Exchanges also released Market Regulation Advisory Notice RA 1405-5 (RA1405-5), which provides more guidance on what actions and behaviors will be deemed disruptive order entry and trading practices.

Generally, Rule 575 prohibits market participants from spoofing, violating bids or offers, or demonstrating intentional or reckless disregard for the orderly execution of transactions during the closing period. Spoofing refers to the practice of bidding or offering with the intent to cancel the bid or offer before final execution.

The text of Rule 575.A-575.D expressly prohibits market participants from engaging in the following, specific actions:

  • 575.A prohibits participants from entering orders “with the intent, at the time of order entry, to cancel the order before execution or to avoid execution.”
  • 575.B prohibits participants from entering “an actionable1 or non-actionable2 message or messages with intent to mislead other market participants.”
  • 575.C prohibits participants from entering “an actionable, or non-actionable message or messages with intent to overload, delay, or disrupt the systems of the Exchange or other market participants.”
  • 575.D prohibits participants from entering “actionable or non-actionable message[s] with intent to disrupt, or with reckless disregard for the adverse impact on, the orderly conduct of trading or the fair execution of transactions.”

With the exception of Rule 575.D, which applies to intentional and reckless conduct, Rule 575(A-C) applies to intentional conduct. The Exchanges view intentional conduct as conduct that “more likely than not was intended to produce a prohibited disruptive consequence without justification.” Given this definition, it is important for market participants to understand that they cannot defend themselves against alleged violations of Rule 575 by claiming ignorance, negligence or lack of knowledge.

For more information and to view the entire text of Rule 575, click here.

1“Actionable” messages are “messages that can be accepted by another party or otherwise lead to the execution of a trade.”  An order message is an actionable message.
2“Non-actionable” messages are “messages submitted to the Exchange that relate to a non-actionable event.  Requests for Quotes, creation of User Defined Spreads (UDS) and administrative messages are example of non-actionable messages.