Information is a funny thing: More is usually better. But once there’s enough data out there, only specialists have the time and ability to parse it. At that point, those specialists are the only ones who can turn information — YOUR information, usually — into profit.
That’s true for the internet, and it’s true for electronic financial markets as well, since they’re basically ultra-fast standardised platforms for information exchange. Really, markets even had their own a version of the “fake news” panic.
Anyway, once CME Group rolls out a new data feed on its US exchanges this weekend, investors trying to conceal large trades could be at an informational disadvantage. First of all, the new offering involves a much higher volume of data, industry sources say, which requires up-to-date infrastructure and extra computing power to process and analyse.
Another key point: Each individual order will have a distinct ID number that everyone can see.
CME says it’s introducing the feed “to increase transparency and customer choice,” because this type of data has been offered for a while by other exchanges.
But if you’ve been following along, you know why this might be a problem. When investors need to make a large trade, they try to conceal their intentions from the broader market. Otherwise, they’re basically walking into a BMW dealership and announcing they MUST buy a new 6-Series today. (It should be said that the car dealer wouldn’t be evil or bad for giving them a higher price — he’d be drawing a conclusion about their demand and pricing the vehicle accordingly.)
Traders on CME’s exchanges have historically been able to conceal sizable trades fairly easily, by using an “iceberg” order qualifier offered by the exchange. They’re called “icebergs” because they only show part of the total size of a trade at any given time. Yes, like the tip of the iceberg.
But with this new data, iceberg orders offered by CME will have the same identification number through the entire trade, according to two industry sources.
This is clearly not ideal for a trader who doesn’t have the budget to hire programmers or a technology vendor. While it won’t be clear how large the total trade is, it will be obvious that there’s more demand than meets the eye. Both sources said they expect high-frequency trading shops to find some way to take advantage.
The problem is pretty easily solvable, of course. A trader could either write an algorithm that splits up the order before sending it to the exchange, or use one from a vendor.
But it’s unclear that the traders who rely on CME-provided iceberg orders — probably ones without huge technology budgets — are even aware a change might be necessary. The exchange announced the new data feed, of course, but like most things in market structure, the industry-provided wording is hard to decipher.
We asked CME if they have alerted traders about the fact the iceberg orders will be displayed this way, and will update with any response.
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