FIA Distinguishes Types of Trading Self-matching
Commentary by Steven Lofchie
In a web post published by the Futures Industry Association, the Principal Traders Group ("FIA-PTG") reviewed the findings of the "Joint Staff Report on the U.S. Treasury Market on October 15, 2014" issued by Treasury and other government agencies on July 13, 2015. In particular, the FIA-PTG discussed the issue of self-trading raised in the Joint Staff Report.
The post distinguishes between intentional and unintentional self trades, noting that "intentional wash trades are illegal self-matches that manipulate the markets by giving the impression of legitimate trading interest or activity at a certain price, time, and size." On the other hand, unintentional self-matches can occur either when: (i) independent decision makers initiate trades for legitimate business purposes without knowledge of each other's order or (ii) trades from the same trading desk are matched "due in part to the technical and operational limits of today's matching engine technology."
Commentary
From an enforcement standpoint, the issue with self-matching is similar to those faced with cybersecurity, or with technology issues generally. Everyone involved knows that there will be failures; i.e., that firms will self-match, or will be the victims of cyber breaches, or will have technology failures. Accordingly, it would be clearly improper to criminalize or even penalize failures that are inevitable, and do not result from material negligence. The problem that regulators must face is distinguishing between those situations: (i) where stuff just accidentally happens and (ii) where there was intentional misconduct or material negligence. The financial industry's worry is that the regulators won't bother to make the effort to get the distinction.