Nadex seeks to amend its rules for handling of customer orders

North American Derivatives Exchange, Inc. (Nadex), a subsidiary of IG Group Holdings plc (LON:IGG), has informed the United States Commodity Futures Trading Commission (CFTC) of its intent to introduce changes to its rules for handling of customer orders.

The notice, dated January 20, 2017, outlines several proposed changes to Nadex’s Rule 5.7, with the Exchange specifying that these amendments are set to better reflect Commission Regulation 38.152, or simply put, the requirements against abusive trading practices.

The CFTC regulations (Section § 38.152) stipulate that “a designated contract market must prohibit abusive trading practices on its markets by members and market participants.” Any trading ahead of customer orders, trading against customer orders, accommodation trading, and improper cross trading, is outlawed. The list of specific trading practices that should be prohibited by designated contract markets include front-running, wash trading, pre-arranged trading (with certain exception), fraudulent trading, and money passes.

In line with these specific requirements, Nadex is making two amendments, the first being the removal of the word “knowingly” from its prohibition on FCM Members or AP/employees trading against customer orders. Following the change, Rule 5.7 (c), (i), states that:

“No FCM Member or AP/employee thereof in possession of a FCM Customer Order may (deletion of “knowingly” made here – Ed.) enter into a transaction opposite such FCM Customer Order directly or indirectly for him/herself or any other Person with whom such FCM Member or AP/employee has a direct or indirect financial interest.”

The rule is apparently becoming stricter, prohibiting this type of abusive trading practices exercised “unknowingly” too.

The other amendment is more formal – Nadex is adding the term “front-running” to its Rule prohibiting trading ahead of customer orders. Thus, Rule 5.7 (d) is set to state that:

“Trading Ahead (Front-Running) of Customer Orders Is Prohibited”.

In case the CFTC has no objections, the amended rules will become effective February 6, 2017.

Concerning this particular section (§ 38.152) of the law, it is worth noting that it was shaped after, back in December 2010, the CFTC issued an announcement on proposed rulemaking. The Commission proposed new rules and amended guidance and acceptable practices to implement the provisions enacted by Title VII of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank).

Nadex’s proposals are hardly surprising to anyone familiar with the strict position of the company regarding meeting regulatory demands and offering high-quality products and services to their clients and partners.

This was underlined by Nadex’s CEO Tim McDermott who, in an interview with FinanceFeeds last year, said that:

“US customers are used to trading on regulated exchanges. They trade equities, stocks and futures on exchange. It is a different mentality of trader that makes up the market place here in America compared to other regions, and therefore companies must be able to offer that kind of clientele an exchange traded product that the customers feel comfortable with, this being a component within a regulated, normalized exchange based market.”

“We want market makers which are registered on our exchange to make our members’ experience the best it can possibly be. If they are successful as well, then thats how it should work. Our end game is that we should have quality markets, which have attributes such as tight, deep markets, and lots of assets”, said Mr McDermott.