Completion of Investigation of mini-sized Dow trading on July 3
The Chicago Board of Trade's Business Conduct Committee recently reviewed an investigative report prepared by the Office of Investigations and Audits regarding activity in the mini-sized *DowSM futures market on July 3, 2003, and determined that there was no basis to conclude that the actions of any market participant violated Exchange rules.
On July 3, 2003, the CBOT® mini-sized DowSM futures experienced a sudden break of approximately 560 points in less than a minute. There was no economic or fundamental reason for the decline and the Exchange therefore promptly invoked its mistrade policy.
Contrary to rumors that have circulated regarding this activity, the catalyst for the market break was not an order entry error. Rather, a large sell stop order was triggered, which, upon execution, elected additional sell stops at incrementally lower prices. The cumulative effect of the cascading stops and the new sell orders entered as the market declined created an unusual order imbalance that caused the price of the mini-sized Dow to break sharply and become substantially misaligned relative to all other related markets.
Based on its review of this incident, the CBOT made several amendments to its mistrade policy to strengthen the bias toward trade certainty in mistrade scenarios and thus reduce the likelihood that trades will be invalidated. Additionally, in conjunction with the CBOT's migration to its new electronic trading platform in November 2003, the Exchange will have additional functionality that will reduce the incidence of mistrades, as well as mitigate the impact of potential mistrades that do occur.
Questions in this regard may be directed to Dean Payton, Office of Investigations & Audits, telephone (312) 435-3658. |
