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Predictor

Restore Confidence In Markets

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I propose the following simple steps are urgently needed to restore confidence in the markets:

 

1. Insure all futures deposits up to 25k at 100%, 25k to a maximum at 85%

2. Require all futures FCM's to electronically report on segregated funds every 24 hours.

2. Require all posted quotes to be valid for at least 300 MS before being cancelled.

3. Ban all darkpools. Require all orders to take place on open market.

4. Remove regulation barring US citizens access to foreign futures exchanges.

5. Ban sub penny quoting.

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2. Require all posted quotes to be valid for at least 300 MS before being cancelled.

 

Do markets need to slow down, or retail traders speed up?

 

Why is no company bulk-renting colocated server space, breaking it down, and sub-letting to retail traders? Is there no market for this? Do exchanges prohibit it?

 

BlueHorseshoe

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I do not think the retail trader even plays a role in the markets. Of course, I may be wrong.. But the institutional trader isn't that fast either which is a good argument for the market to slow down.

 

The situation is that the HFT's have made it difficult for the institutions to do business in the open markets and so they've went to dark pools.

 

The idea is that by imposing some limitations on the HFTS and enforcing the institutions back into the market that we will have a fair and open market again.. Doesn't mean that traders won't lose but we'll be sure we know what the price is at any given time and that some aren't outright cheating the system.

----

 

I would also add additional rule to consider congress insiders in areas where they have non public information.

 

Do markets need to slow down, or retail traders speed up?

 

Why is no company bulk-renting colocated server space, breaking it down, and sub-letting to retail traders? Is there no market for this? Do exchanges prohibit it?

 

BlueHorseshoe

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The situation is that the HFT's have made it difficult for the institutions to do business in the open markets and so they've went to dark pools.

 

The idea is that by imposing some limitations on the HFTS and enforcing the institutions back into the market that we will have a fair and open market again..

 

I think that this is only a fair argument in so far as one supposes that the markets exist to serve institutions moreso than they exist to serve HFTs. Where an insitution is acting on behalf of a producer/consumer who needs to hedge risk in the underlying, or where the institution represents mutual funds or, generally, the retirement assets of the typical citizen, then this may be true.

 

If the markets were regulated to benefit institutional trading, would this really be fair?

 

BlueHorseshoe

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A few years ago in Australia we had a very famous tax minimisatio method called the Bottom of the Harbour Scheme - if you had a substantial income and were willing to participate in this scheme it made the payment of tax optional (a lot of people on substantial incomes jumped willingly on board).

More and more people participated in this tax scheme and thus the Government had to close it down and how - they backdated the legislation - people screamed (the backdated penalties for participating in this scheme were 150%) but this scheme threatened the whole fabric of the tax base of the country.

Why not do this when market manipulation etc. is discovered - i.e. just let it be known that the government is will backdate legislation and the legislation will include a severe penalty.

Simple.

Why not do it now.

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I propose the following simple steps are urgently needed to restore confidence in the markets:

 

1. Insure all futures deposits up to 25k at 100%, 25k to a maximum at 85%

2. Require all futures FCM's to electronically report on segregated funds every 24 hours.

2. Require all posted quotes to be valid for at least 300 MS before being cancelled.

3. Ban all darkpools. Require all orders to take place on open market.

4. Remove regulation barring US citizens access to foreign futures exchanges.

5. Ban sub penny quoting.

 

1...why insure, why not actually make it safer by segregating it - all of it. Crooks love insurance - it means it still ok to steal it as someone else will cover it.

2....fraud will still occur - again making it safer, and not just the pretense of being checked.

2a....just have a level playing field, and dont allow quotes that would have been hit to be cancelled. If I understand it some HFT have the ability to pull out when they know they might get hit - I think a lot of this has to do with multiple exchanges etc - but requotes and speed to flush out buyers and sellers has occured before computers - no one has really explained adequately why this is new, or such an issue. Different order types for selected clients - a different story.

3....The dark pools were designed to get around the front runners and insiders - get rid of multiple exchanges, allow more transparency and make the exchanges non profit - that might throw something into the mix.

4...no comment - not US

5....see 2a - sub penny quoting is fine - if everyone can do it and the order types are fair for everyone.

 

:2c:- To restore confidence you need to ensure that the markets work in a fair and orderly manner for all participants (speed and location dont play a part here) and that criminals are prosecuted. To many firms (banks) are prosecuted and settle time and time again for what would be considered fraud, price rigging and corruption in any other industry......and yet why would we expect them to do anything else given they are encouraged to do so and then have no downside.

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>>1. Insure all futures deposits up to 25k at 100%, 25k to a maximum at 85%

 

1. Insure individual futures account deposits up to $250K, a maximum of $1M total for all accounts belong to one SSID/EIN. The program should work like the FDIC and not require depositors to go to court or deal with the delays associated with bankruptcy. [ Canadian customers of MF Global and PFGBest have a similar program and recovered their funds from the Canadian government within three days. ]

 

>>2. Require all posted quotes to be valid for at least 300 MS before being cancelled.

 

2. Restore the intent of the REG NMS National Best Bid or Offer (NBBO) by forcing some serialization of quotes and cancels from the same customer. What I mean is you have to wait for some exchange computer to see and "stamp" your quote before you can cancel it or submit another quote. The exchange computer implements some fairness round-robin algorithm that makes your quote visible and only then can you stuff the pipe with another order.

 

also...

 

Charge for excess quotes.

If the ratio of cancels to quotes exceeds 100:1 charge $0.02/quote for all quotes, else

if the ratio of cancels to quotes exceeds 25:1 charge $0.01/quote for the number of quotes over 1000.

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I think that too much insurance might drive up the costs too high which we don't want. Futures are highly leveraged and as such we don't too keep too much in the account. This would encourage brokers to offer better incentives to those who kept more in account. By not requiring 100% insurance then this still encourages traders to review their broker..

 

The other option is to enforce the segregated accounts at a structural level and require the NFA to hold the accounts. This option wouldn't require insurance and could still offer protection for client funds.

 

 

>>1. Insure all futures deposits up to 25k at 100%, 25k to a maximum at 85%

 

1. Insure individual futures account deposits up to $250K, a maximum of $1M total for all accounts belong to one SSID/EIN. The program should work like the FDIC and not require depositors to go to court or deal with the delays associated with bankruptcy. [ Canadian customers of MF Global and PFGBest have a similar program and recovered their funds from the Canadian government within three days. ]

 

>>2. Require all posted quotes to be valid for at least 300 MS before being cancelled.

 

2. Restore the intent of the REG NMS National Best Bid or Offer (NBBO) by forcing some serialization of quotes and cancels from the same customer. What I mean is you have to wait for some exchange computer to see and "stamp" your quote before you can cancel it or submit another quote. The exchange computer implements some fairness round-robin algorithm that makes your quote visible and only then can you stuff the pipe with another order.

 

also...

 

Charge for excess quotes.

If the ratio of cancels to quotes exceeds 100:1 charge $0.02/quote for all quotes, else

if the ratio of cancels to quotes exceeds 25:1 charge $0.01/quote for the number of quotes over 1000.

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I think that too much insurance might drive up the costs too high which we don't want.

 

On the morning of July 9th 2012 I made a few trades in my PFGBest account. I tried to make another trade later in the day and it was rejected with an insufficient margin message. About 24 hours later I understood that my entire margin deposit at PFGBest had effectively vanished from the face of the earth. Maybe I'll see 20% recovery within 3 years time. Maybe more. Maybe less.

 

This past week I opened a new futures account and had to consent to about a dozen agreements, some of which were designed by the NFA, to warn me of the dangers of trading futures and protect the brokerage firm in the event I go bankrupt. No where in this paperwork did I see a disclaimer that the brokerage firm might mishandle my funds or that my margin deposit was at risk for reasons other than my own trading.

 

I enjoy futures but I can't justify the effort unless I trade a large enough account to hold multiple bond, crude, or gold contracts overnight. The stock market has the SIPC and that is where the bulk of my liquid business funds will stay while I see if the CFTC will fix the futures industry.

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