CME/CBOT shld be shat upon...

Discussion in 'Wall St. News' started by 2cents, May 24, 2006.

  1. what a f*cking shame... just bumped into this... i trade on OTC mkts where you'd slit peoples throats if they don't respect anonymity...

    FYI, Chris Hehmhyer heads Goldenberg Hehmeyer. WSJ article referenced is below

    "I know that a couple of large institutions spent $10's of millions building a
    database that sniffs out market patterns. These databases constantly ping
    various futures' participants and from the counterparty data figure out who is
    doing what. These institutions, depending on the counterparty data, then
    either race the counterparty or try and push the market the opposite way."

    The CME/CBOT's lack of anonymity is an issue

    The CME/CBOT's lack of anonymity is an issue. In various ways, counterparty
    data (both clearing firm and individual trader identification) is
    electronically sent in real time to market participants. Certain data is only
    received by clearing firms.

    From a shareholder point of view, in the electronic world, nothing but 100%
    anonymity (including no nightly batching) makes any sense. Anonymity speaks to
    integrity, fairness, and creates more volume and liquidity. Also, there is no
    legitimate purpose to ever sending out any counterparty data in the electronic
    world. If the clearing corporation confirms that a trade has matched between
    two parties, the trade is good and no other data is needed. Do we remember the
    "clearing corporation is the seller to every buyer and buyer to every seller"?
    This is Futures 101. In fact, 100% anonymity is the case at Eurex, Liffe, and

    Interestingly, over the past several months, I've run across analyst reports
    where analysts have trumpeted the CME being anonymous. Also, in general, I
    believe that the market believes the same to be true for the CBOT. As this
    lack of anonymity has started to leak recently, I spoke with a few CME/CBOT
    executives and they all seemed to prefer anonymity. CME has even hinted at
    moving towards anonymity. And four weeks ago, in a related Wall Street Journal
    article, CBOT Chairman Charlie Carey said, "Anonymity has to win out on this."
    Yet, all of this and nothing has happened.

    So, why in the world is this not happening, as technically it is very easy to
    quickly stop pouring out this sensitive counterparty data? I'm not sure, but I
    do know that a couple of large institutions spent $10's of millions building a
    database that sniffs out market patterns. These databases constantly ping
    (with one lots) the various futures' participants and from the counterparty
    data figure out who is doing what. These institutions, depending on the
    counterparty data, then either race the counterparty or try and push the market
    the opposite way. This is bad for CME/CBOT and, for that matter, the futures

    If the CME/CBOT end up agreeing that this is bad, the result should be 100%
    anonymity, as anything less is "kinda pregnant". In fact, if they don't go
    100% anonymous and there is a stiff challenge, like ICE vs. CME (NYMEX), I
    believe that ICE and their anonymous market will win hands down. After all,
    integrity and fairness are the foundations upon which the Chicago exchanges
    sit...volume and liquidity are the result. The foundations need to be solid.


    Chris Hehmeyer


    Goldenberg Hehmeyer



    CME and CBOT to Close Loophole

    Exchanges to Take Steps To Protect the Anonymity Of Investors Trading Online
    April 15, 2006; Page B6

    Chicago's two major futures exchanges are closing a little-known loophole that
    is undermining the anonymity of electronic trading and perhaps giving big
    investors an edge.

    At issue is the distribution of traders' identification to brokerages as
    transactions on the Chicago Mercantile Exchange and CBOT Holdings Inc.'s
    Chicago Board of Trade are finalized, or cleared.

    One brokerage, Goldenberg, Hehmeyer & Co., earlier this year figured out how to
    take advantage of that information by determining almost instantly the identity
    of investors on the other side of transactions executed by the firm for itself
    or for its customers. Goldenberg Hehmeyer, based in Chicago, had been planning
    to start telling customers who was on the other side of their trades and using
    such information to shape its own in-house trading strategy, said Co-Chairman
    Christopher K. Hehmeyer.

    When stocks are traded on public exchanges, investors generally don't know who
    they are buying from or selling to. On futures exchanges, most investors expect
    the same thing when trading electronically.

    The reason: Say Investor A has just sold a bunch of gold futures to Investor B.
    Then the price of gold futures starts falling. If Investor A knows that
    Investor B is too small to ride out the slump and is generally a short-term
    trader, Investor A can squeeze Investor B by demanding an even lower price to
    buy back the futures.

    Mr. Hehmeyer says he believes online markets should be anonymous, and he
    complained vociferously about holes in the exchanges' systems. He said he
    decided they weren't moving quickly enough to plug them, so he made plans to
    start taking advantage of them himself and letting his customers do likewise,
    fearing competitors might already be doing so.

    Mr. Hehmeyer informed the two exchanges of his plans several weeks ago. After
    The Wall Street Journal questioned the CME, a unit of Chicago Mercantile
    Exchange Holdings Inc., about the matter, it sent a notice to members Wednesday
    saying it would "suppress" the trader-identification data on online trades
    beginning April 30. At the CBOT, Chairman Charles P. Carey said, "We'll be
    discussing it shortly. I suspect we'll do the same thing as CME."

    On the exchanges' floors, details of trades are jotted down on cards. The
    details executed on either of the exchanges are sent to the CME's
    clearinghouse, which completes the transaction and guarantees both sides -- the
    grease that makes the whole system work. These details include numbers used to
    identify traders, making it easier to trace and rectify errors.

    When the clearinghouse clears the trade -- sending brokerages cash for their
    sellers and contracts for their buyers -- it includes both sides'
    trader-identification numbers. That's no big deal on floor trades, because they
    are conducted face-to-face, so there's little expectation of anonymity.

    The system gives floor traders a big advantage, which is why many big
    investors, such as hedge funds, didn't do much business on the exchanges until
    the late 1990s, when they ramped up their electronic trading capabilities. Once
    that happened, big investors grew confident that the floor traders' edge had
    been neutralized, and a huge boom in futures trading commenced. About 70% of
    each exchange's volume these days is electronic, including contracts covering
    everything from the Standard & Poor's 500-stock index to Treasury bonds, as
    well as many commodities. Both are public companies with profit margins and
    growth that are the envy of the exchange industry.

    Exchange members say that errors are practically unknown in electronic trades,
    yet the exchanges still ship trader-identification numbers to brokerages.
    Members know all the traders' numbers, allowing member brokerages like Mr.
    Hehmeyer's to use powerful computers to determine almost instantly who is on
    the other side of his and his customers' trades -- and to adjust their trading
    strategies accordingly.

    The CBOT's Mr. Carey says he believes that trader-identification numbers are of
    limited usefulness once a trade is executed and that the board's online markets
    long have offered sufficient anonymity. But he acknowledged that as technology
    has allowed the exchange to send data to brokerages more quickly, concerns have
    grown that they can use the information to get an edge.

    "If we have people who are concerned about it, then we'll make changes," Mr.
    Carey said. "Anonymity has to win out on this." (The CBOT's listings include
    futures based on the Dow Jones Industrial Average, which is owned by Dow Jones
    & Co., publisher of The Wall Street Journal, and receives licensing fees from
    the CBOT.)
  2. mcurto



    I don't understand, are you quoting Chris Hehmeyer on the first paragraphs before you cite the WSJ article or are most of those paragraphs your opinion? From what I have heard GHCO and some very large traders that clear them are already using this technology, just looking for the OK from the exchanges to make sure it is legal. Can't forget one of these guys trading/clearing at GHCO is about 10-20% of daily 10yr futures volume, so the exchanges don't want to piss him off. The information still gets around in the futures industry even in 100% anonymous markets, traders still outsource their execution to Chicago brokerage teams for most of the banks and when any size trade occurs on the screen I can easily call a handful of brokers and find out who executed the order. I don't believe in the use of the individual trader ID, that is bad. The clearing firm is enough, only about 3 clearing firms for Chicago locals and the balance of the firms are considered "paper" orders. That is all that is needed.
  3. not my opinion, this is all from Hehmeyer... i think this is very bad... of course there are ways around it like splitting the volume between CME/CBOT and other platforms OTC or not so nobody knows where you stand at a particular point in time, but... honestly i was expecting better from regulated exchanges...
  4. i'll be honest with you... the day i decide to go into 10yrs i'll first arrange for bill gross to have a serious accident, its not the money it will cost me... does the mkt no good to have one guy doing 20% of the volume and squeezing everybody else at will... now if he is enough of a c*nt to make himself a target, then so be it...
  5. thx for sharing this. have you encountered any articles or sources that describe the legal/regulatory and technical loophole in finer detail? for instance, if i'm trading at CME through a retail broker, is it my broker or the CME that's revealing my individual ID as opposed to just clearing number? should i be more concerned with chinese wall type barriers within a full service discount broker/clearer?

    To what degree is this just lip service from the CME?

    i'm thankful to mr. Hehmeyer, advocating the fair fight
  6. mcurto


    Ok, so looks like Hehmeyer is saying either everyone has it or noone at all. In terms of the 10yr, I wasn't talking about Bill Gross as being 20% of the daily volume, it is actually a Chicago local who clears GHCO who is 20% of daily volume. To tell you guys the truth, if you are a small retail trader, the banks could care less what you are doing. They are trying to figure out what the other banks are doing and big locals like Brumfield and others. As much as you complain it will do nothing. The CBOT is an incredibly fair and transparent market. I'm not sure which OTC market you trade on, but almost all of them internalize order flow and even though charge no commissions provide horrendously wide and fragmented markets.
  7. I know for a fact that all the big GHCO use and abuse counterparty. So while he might say the markets at the CBOT and the CME need to be anonymous, he undoubtedly loves the money his big boys steal from people.

    Matching fills with counterparty is totally for crooks.

    Several times on the last year and a half I have heard the CME and the CBOT say they were taking it away, only to see the deadlines pass and nothing change.
  8. i trade FX via ECNs, HotspotFXi is strictly anonymous (while Currenex isn't... am not saying everything is perfect in the FX world either, far from it), am neither big nor small, do a few yards /mth, i just find it ludicrous to allow anonymity to be tampered with like that, particularly on a regulated market, and when the exchange knows how its being used! nothing short of criminal imo...
  9. They can extract information from program traders and scalping/market making firms: who has huge limit orders, who's selling/buying huge at market.
    Small and position traders are not affected at all. They might just see your order once in a while but they don't know if you're closing or opening a position (I think)
    Can they figure your margin too with counterparty fill info?
    EDIT seems this is what they are doing, they scan for bunchs of orders with too little margin and try to detect their "puke point" aka support/resistance.
  10. RedDuke


    Stuff like this is one of the reasons why I love this board. Thanks a lot for brining it to our attention. I fully realize that it will not affect me (way too small and unimportant), but it is nice to know how things work behind the scenes.
    #10     May 25, 2006