This is not a loophole

The WSJ attempts to describe a loophole in the CME:

‘Firms can use their early looks at CME trading data in several ways. One strategy is to post buy and sell orders a few pennies from where the market is trading and wait until one of the orders is executed. If crude oil is selling for $90 on the CME, a firm might post an order to sell one contract for $90.03 and a buy order for $89.97.

If the sell order suddenly hits, the firm’s computers detect that oil prices have swung higher. Those computers can instantly buy more of the same contract before other traders are even aware of the first move.’

Once a trade happens, the CME has to send out three types of messages: 1) it has to send a trade confirmation message to the buyer and the seller, 2) it has to send an update of the last traded price to all market participants, 3) it has to update the order book for all market participants.

Common sense implies: one message has to be sent before the other. Like most exchanges, the CME chooses to send the trade confirmation first, then the last traded price and then the order book update. The so-called loophole is that the participants in the trade are able to deduct from their trade confirmation messages what the new bid/ask spread is before the order book is sent out to all market participants – gaining maybe 1 millisecond on their competitors.

As a result, using the example above, they might be able to bid 90.00 before their competitors and hope to lock in a quick profit. Obviously, there is absolutely no guarantee they will get filled at that level.

That’s it. Now what is all the fuss about?


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