In an effort to guard against trading errors such as “fat finger” mistakes and other sources of extreme market volatility in early hours trading, the Bourse de Montréal Inc. (MX) is proposing to introduce a new trading control.
The MX is planning to introduce new “top-of-the-book price limits” to help act as a bulwark against erroneous trades and excessive market volatility, alongside its other existing trading controls.
“The Bourse already has multiple controls in place that play an important role in the overall market risk management and now wishes to introduce a new dynamic control within its existing suite,” it said in a notice outlining the proposal.
The proposed new functionality would validate an order’s limit price “against the most recent dynamic snapshot of the resting bid/ask for a given contract within the [order book],” it said.
Orders that fall within the limits would be allowed into the electronic trading system, while orders outside the limits would be rejected.
Initially, the new control will be used to protect market integrity on index futures during the early trading session (2:00 a.m. to 9:15 a.m.) when the underlying indices are not being calculated in real time, the exchange said.
The proposed new controls are expected to “reduce erroneous and disruptive orders during early session hours by preventing orders that are not consistent with the principles of market integrity,” it said.
Ultimately, the MX aims to implement the new control for all products (options and futures), saying that this would “allow for better control of mispriced orders, improving the management of short-term volatility of listed products over the whole trading session.”
Comments on the proposals are due by Aug. 16.