On cross-trades

In the course of its monitoring of on-exchange trading of market participants, the Bank of Russia detects cross-trades which may be qualified as market abuse.

These cross-trades are conducted on the basis of orders made by an entity acting both as a seller and a buyer in a transaction conducted for its own account as a result of cross-orders being placed:

1) Through various participants (brokers, banks, etc.) by one entity with a different customer identification code registered with the exchange; or

2) Through one participant in the event the exchange authorises the said trading participant, upon its request, to conduct cross-trades.

In some cases, these trades are conducted via algorithmic trading systems operating on behalf of one and the same entity. This results from the fact that mechanisms preventing on-exchange trading transactions between various ‘strategies’ were not implemented in the relevant algorithms.

In this regard, the Bank of Russia finds it necessary to inform market participants as follows.

The trades, obligations under which are fulfilled for the account and on behalf of the same entity, may result in sufficient deviations of trading parameters. As a whole, they may be qualified as market manipulation pursuant to Article 5, Section 1.3 of Federal Law No. 224-FZ, dated 27 July 2010, ‘On Countering the Misuse of Insider Information and Market Manipulation and Amending Certain Laws of the Russian Federation’ in the event the trades are conducted on the exchange on the basis of orders addressed to all participants and in the event information on entities which placed orders and on whose behalf the orders were placed is not disclosed to other participants.

The Bank of Russia recommends that market participants, when developing algorithmic trading systems, take into account the risks that arise out of the conducting of on-exchange cross-trades.

Participants, prior to filing an application with the exchange in order to receive an authorisation for their clients to conduct cross-trades, are recommended to consider whether this authorisation would be relevant and expedient. In the event the said authorisation is given to a client which is a foreign entity providing services to third parties in the financial market, the participant is recommended to consider whether it would be relevant for the exchange to register ‘second-layer’ clients to be able to discern clients on whose behalf trades are conducted.

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