FOOTNOTE 63 See FIA Recommendations for Risk Controls, supra note 62, at 3. END FOOTNOTE
FOOTNOTE 64 See FIA Market Access Recommendations, supra note 23; ESMA Guidelines on Systems and Controls, supra note 4, at 33 . END FOOTNOTE
As with the pre-trade and post-trade risk controls, certain system safeguards would be applicable to more than one entity or would require coordination between entities. For example, ATS design and operation tests will require that trading platform operators provide suitable test environments that accurately recreate the "live" trading platform. Similarly, safeguards that provide for the immediate disconnection of a market participant in the event of emergency or breach of tolerances should be available to the market participant, its clearing firm, and the relevant trading platform so that all parties have the capacity to initiate a disconnect when necessary. As with other overlapping measures contemplated in this Concept Release, the Commission requests public comment regarding the necessity of such overlaps and the most efficient way to administer them.
1. Existing DCM Risk Controls
Risk controls implemented by one or more exchanges broadly address market stability. One large DCM ("DCM A") employs price reasonability validation controls (aimed at preventing "fat finger" type errors) and position validation controls (both absolute limits and net long/short limits). In addition, DCM A has implemented a circuit breaker protection against price spikes. This control provides floor and ceiling price limits within a specific timeframe and market, and recalculates new floor and ceiling price limits based on current market prices for each new timeframe. If the floor or ceiling price is exceeded, the market is put in a "hold" state, although trading will not be halted in the opposite direction of the hold. The length of the hold varies depending on the market and orders submitted during the hold state will remain in the order book but will not be matched. DCM A has also implemented kill switches that provide it and risk managers at trading firms with the ability to halt trading.
Similarly, another large DCM ("DCM B") also employs a limit price to each market order and stop order to prevent orders from being filled at significantly aberrant price levels, and maximum order size protection to prevent entry of erroneous orders for quantities above a designated threshold. DCM B employs a functionality that introduces a 5-20 second market pause when triggered stops would cause the market to trade outside of predefined values. This is designed to prevent excessive price movements caused by cascading stop orders. DCM B also employs a functionality that introduces a 5-20 second market pause when a sub-second, extreme market move occurs as a result of order entry. This functionality is designed to detect significant price moves of futures contracts occurring within a predetermined period of time, and triggers a pause in matching activity to provide time for additional resting orders to populate the order book.
DCM A seeks to optimize message flow through both hard limits and market incentives. It employs a message throttle limit which sets a maximum message rate per second for each user session and prevents the submission of messages in excess of the maximum rate. The second form of message control used by DCM A is a system of fees based on Weighted Volume Ratio ("WVR") calculations designed to discourage inefficient messaging among firms with high message volumes. The WVR is a ratio between the number of messages submitted by a market participant and the total volume of orders that it executes. The ratio of unfilled orders is also weighted based on how far away from the best bid or offer each unfilled order was when it was entered. Orders that are farther away from the best bid or offer when entered are weighted more heavily. The DCM assesses fees against market participants when they exceed WVR limits.
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