Market Access Subcommittee 

Interim Report 

Best Practices for Organized 

Electronic Markets

Commodity Futures Trading Commission 

Technology Advisory Committee1

27 November 2001 

 

1

 The members of the CFTC's Technology Advisory Committee are listed in Attachment I. 
2 

Table of Contents 

Mission Statement 3 

Background 3 

Best Practice Recommendations 

 Bandwidth, Order Eligibility and Flickering Quotes 6 

 Block Trading and Internalization of Order Flow 8 

 Transparency Issues 14 

 Marketmakers 15 

Conclusion 17 

Attachment I Technology Advisory Committee Members 19 

Attachment II Market Access Subcommittee Members 22
3 

Mission Statement

Mission of the Market Access Subcommittee2

The mission of the Market Access Subcommittee includes (1) addressing the public 

policy aspects of the nexus between applications of technology to organized markets and 

how those applications of technology might be used to facilitate or to frustrate fair and 

equitable access to organized markets by all relevant market participants and (2) assisting 

the Commission through the Technology Advisory Committee, in fulfilling its mission 

statement, in particular, “...analyzing the application of new technologies in financial 

services and commodity markets, as well as by market professionals and market users, 

particularly in the areas of system capacities and readiness, order flow practices, and 

clearing and payment activities...” 

Organized markets may operate in physical, automated or electronic venues. The Market 

Access Subcommittee has completed its review of market access issues germane to 

organized markets operating in electronic venues. The work of the subcommittee should 

continue, allowing it to address issues unique to organized markets operating in 

automated and physical venues. At this time the subcommittee’s recommendations and 

best practices for electronic venues is submitted to the full Technology Advisory 

Committee for its review, as its Interim Report.

Background

The costs of regulation and market access preferences, over time, should produce real 

economic benefit to public market participants in a proportion that is roughly equivalent 

to the associated public costs. That is, the real economic costs of (1) public sector 

regulation; (2) private sector regulation (e.g., rules adopted by organized markets and self 

regulatory organizations); and (3) applications of technology, privileged market access 

and trade processing conventions adopted by organized markets should be balanced 

against a reasonable expectation of proportionate and concomitant public benefits 

(presumptive responsibility). In particular, the Market Access Subcommittee has been 

guided by (2) and (3) above. 

Market Access Efficiencies 

Dramatic changes in computing and communications technology can now make decision 

critical information available, real-time, anywhere in the world, in a form that can easily 

be exchanged with other parties, at a marginal cost of nearly zero. This makes it both 

technically feasible and cost-effective for market participants to enter into transactions on 

electronic market venues that heretofore would otherwise have been too costly to 

 

2

 The members of the Market Access Subcommittee are listed in Attachment II. 
4 

undertake. Even the pure economics of inaugurating and maintaining new markets have 

changed. In contrast to the more customary expenses of physical market venues, the new 

economics of modern organized markets are measured in kilobytes, nanoseconds and 

bandwidth. 

Privileged Market Access 

Market participants with either superior market information or superior market access, 

over time, will have a considerable and arguably unfair market advantage over those 

whose market information or market access is subordinate. In physical markets, clients 

must open accounts with futures commission merchants (FCMs); their orders must be 

filled by registered floor brokers, and the trade processing conventions of the physical 

environment ostensibly mandate trade intermediation at execution (floor members have 

the opportunity to execute their trades opposite the orders of customers). 

All electronic environments are very different. Mandated trade intermediation at 

execution has been largely replaced by the time/price paradigm.3

 There are no registered 

floor brokers in an all electronic market. Some new electronic markets have no FCMs, or 

any trade intermediaries at all.

Privileged market access refers to any rule, policy or processing convention of organized 

markets that discriminates between classes market participants when providing any of 

their services, access to their services, or access to market critical information. There are 

other market privileges more specific to marketmaker structures that are addressed in that 

section of this Interim Report. 

Market Structure

Virtually all theories that form the foundation of presumptive responsibility, public sector 

regulation and private sector rules and processing conventions have been originally based 

upon the model of organized markets operating in a physical venue. Worldwide, many 

organized markets are gravitating to all electronic, screen-based venues. Many organized 

markets, historically operating exclusively as physical venues are currently in a hybrid 

cusp of highly automated physical venues. Newer organized markets, particularly those 

outside the U.S., are electronic and have never been otherwise. Where present, this 

migration continuum of physical, to automated, to electronic venues has veritably always 

been accompanied by a diminished need for and hence, a decreased presence of 

 

3

 An order from any class of market participant with the oldest time stamp, within a limit price will be 

executed firstly. There are many other trade match algorithms. Some match proportionately against all 

opposite orders at the same limit price. Others give priority to a market participant that “turns” the market. 

Most importantly, these are all quantifiable economic criteria that can be automated without subjectivity 

and which do not, in and of themselves, provide a market advantage or other market preference to any 

market participant or class of market participant. 
5 

processing intermediaries and, therefore a diminished level (or a complete absence) of 

presumptive responsibility for trade processing intermediaries to continue to assume. 

Supervisory Oversight 

As the means of accessing markets and the costs of such access have been dramatically 

reduced, the continued presence of these privileged market access structures continues to 

involve a pubic cost. This public cost comes with a presumption that these privileged 

market access structures and mandated trade processing intermediaries are accompanied 

by a concomitant public benefit, most likely a high standard of performance. Many of 

the provisions of the Commodity Exchange Act (as it applies to Designated Contract 

Markets) and of organized markets’ rules were originally based on the presumption that 

exchanges would continue as physical trading venues and that order transmission, 

execution and confirmation media would continue to be dominated by telephone and 

paper. 

The Commodity Futures Trading Commission Act (the “CFTC Act”) enacted in 1974, 

substantially updated the Commodity Exchange Act (the “Act”). However, the context 

for that effort was an environment of “brick and mortar” marketplaces and high costs of 

accessing markets other than through “tiers” of market intermediaries. Trade 

intermediaries, segregation of client funds and other initiatives were present by virtue of 

regulations and/or organized markets’ rules and processing conventions. 

Structured Approach 

Regulations, rules, processing conventions and the application of technology (as they 

affect market access) should be fundamentally as different for physical, automated and 

electronic venues as the processes of those respective venues differ from each other. 

Equally, the presumptive responsibilities of processing intermediaries that have been 

granted market access privileges, in any venue, should remain proportionate to the public 

costs of being granted those market access privileges, particularly now, with the 

observable migration of markets from physical, to automated, to electronic venues. 

The continued application of private sector rules, structures and processing conventions 

that were developed and presumably justified in an environment where market access 

was not global in scope and achievable at declining costs, may serve to perpetuate 

privileged market access by market participants or classes of market participants as these 

organized markets continue to migrate from physical, to automated, to electronic. 

Structure should be developed that would address and review the continued 

appropriateness of applying regulations, private sector rules, processing conventions and 

the application of technology (as it may affect market access) that were developed for 

physical venues to automated venues and electronic venues to ensure that (1) privileges 

of classes of market participants are not perpetuated solely by the phenomenon of 
6 

migration of organized markets from one venue to the next: and (2) the privileges of 

classes of market participants in all venues should be re-justified by an analysis that 

weighs the public benefits against the public costs of such privileges. This analysis 

should include a discussion of the relevant public policy issues raised and must involve 

input both by organized markets whose venues provide such privileged access and by 

market participants whose market access would be deemed as subordinate. 

Best Practice Recommendations

I. Bandwidth, Order Eligibility and Flickering Quotes 

Bandwidth 

Bandwidth is defined as the total end-to-end electronic processing: the receipt of orders 

from the client to the venue of the order book. This is not exclusively transmission 

(communications line) time. 

Recommendation I A: An organized market operating an electronic venue should not 

ration the processing capabilities (bandwidth) of its automated order processing systems 

in any way that would create or maintain a market access preference for any market 

participant or class of market participant. 

It is understood that the presence of credit controls would have the manifest tendency to 

take longer to process end-to-end as defined above. Given this constraint, all orders 

subject to credit or similar types of filters must be processed in a way that would not 

create or maintain a market access preference for any market participant or class of 

market participants. In an attempt to circumvent this best practice, organized markets 

should not mandate that entire classes of market participants’ orders be subjected to 

credit control processing, where there are arguable and distinguishing differences (in 

credit quality) present in that class of market participants. Doing so could only be 

deemed a tactic to intentionally provide preferential market access to a class of market 

participants by intentionally delaying the receipt of their orders (into the order book). 

Recommendation I B: Organized (electronic venue) markets should maintain the 

operating capacity to operate their electronic markets (including order entry systems), 

even on remarkable market days, without noticeable and significant system processing 

degradation. 

The subcommittee recognizes, especially when trading options products in an electronic 

market venue, that computer (or other automated) generated bids and offers will need to 

be near continuously refreshed as the price of the underlying product (or volatility) 

change. This will necessarily consume large portions of the end-to-end processing 

bandwidth of the affected organized market. As organized markets provide a public 
7 

benefit by providing price transparency into their respective markets, bids and offers that 

are frequently refreshed (principally through “cancel/replace” orders) provide a 

significant public benefit. The adequacy of organized markets' processing bandwidth 

should be examined and reviewed by their respective outside audit firms and by national 

authorities. 

The subcommittee recognizes that maintaining and upgrading an organized market’s 

(electronic venue) end-to-end processing bandwidth necessarily involves a significant 

and concomitant expense. Organized markets may recapture this “capacity” expense by 

charging fees to those market participants that consume its processing bandwidth, 

proportionate to usage4

 of such processing bandwidth. An organized electronic market 

which experiences no discernible order entry system degradation on remarkable market 

days but which recaptures the expense of maintaining the bandwidth to do so, is 

preferable to an organized electronic market that routinely experiences order queuing 

delays and charges no such fees to recapture the expense of providing its order entry 

bandwidth which might otherwise ameliorate such queuing delays.

The subcommittee recognizes that all organized electronic markets must have some

capability to queue incoming orders to otherwise prevent the trade match engine from 

becoming overwhelmed and from crashing. In all such cases organized markets should 

(1) ensure that market participants have access to the "rules of engagement" under which 

all such queuing algorithms operate; (2) attempt to implement the queuing as close as 

possible to the point of entry of the order (the furthest from the order book); (3) use time 

exclusively (FIFO) as the basis for subsequently releasing queued orders into the order 

book; and (4) ensure that no queuing algorithm could otherwise create a market access 

privilege for any market participant or class of market participant. Implementing the 

queuing process as close as possible to the client also puts more control into the hands of 

the client, ensuring that they are promptly informed that some portion of their orders are 

now subject to a trades per second queue. The client could then better manage its own 

order output stream, knowing when a queuing threshold has been triggered, and when 

such queue is no longer operating. 

Order Eligibility 

Recommendation I C: An organized market operating an electronic venue should not 

operate any order processing system, pass any rule or allow any order processing 

conventions that impose any restrictions (other than the presence of credit filters or 

automated incoming order queuing algorithms) or otherwise discriminate between 

computer generated orders versus non-computer generated orders. 

This prohibition is universal and is otherwise independent of any class of market 

participants. Applications of technology should not be used to create or to maintain 

privileged market access. 

 

4

 Market participants that have a ratio of quotes (orders) to executed trades higher than that which is more 

typical of that product/venue should expect to pay a higher proportion of trade submission fees. 
8 

Recommendation I D: An organized electronic market should not, under any 

circumstances, ration or throttle its order processing operating bandwidth by 

establishing or maintaining restrictions on types of orders, or class of market 

participants. 

Flickering Quotes 

The subcommittee addressed the issues associated with flickering quotes within the 

context of the challenges of providing robust bandwidth in electronic market venues. 

Price injection (ostensibly only to improve one's queue position in the order book) has 

become problematic. The consensus of the subcommittee is that flickering quotes are not 

bad; they are real quotes that are subject to immediate acceptance. However, bandwidth 

congestion as a side effect associated with flickering quotes is detrimental. 

There are significant public benefits associated with valid and robust price discovery. 

Flickering quotes may consume more bandwidth than they contribute to bona fide price 

transparency. Said another way, while not being illegal, flickering quotes often involve 

more public costs (by congesting bandwidth) than they provide public benefit. 

Restricting order entry bandwidth may constrict (depending on the levels at which order 

queuing commences) price transparency as some bona fide quotes will be delayed or 

rejected at the order entry gateway. If markets had free and open bandwidth, even with 

machine gun quotes, the market would be alert and able to deal with potential abuse. 

Best practice would be for organized markets operating electronic venues to provide 

sufficient order entry bandwidth so that, even during active markets, there would not be 

significant observable system performance degradation. In order to pay for such robust 

bandwidth, market participants would pay fees for bandwidth usage. However, all 

organized markets operating electronic venues, even those with the most robust order 

entry bandwidth still need to have the capacity to queue orders at the order book gateway, 

but to do so without discriminating among market participants or classes of market 

participants.5

II. Block Trading, and Internalization of Order Flow

From a public policy perspective, block trading is, on net, beneficial. Providing an 

appropriate structure (and assuming that the subcommittee’s best practices are 

assimilated) to accommodate block trading on electronic venues has the potential to 

attract some portion of privately negotiated contracts, agreements and transactions that 

would otherwise be executed away from organized markets, back onto organized 

markets. By doing so, these large transactions would improve price transparency, add to 

liquidity, provide revenues, become assimilated into the audit trail, become subject to 

private sector rules and public sector regulations and quite likely benefit from all of the 

 

5

 The subcommittee is uniformly of the opinion that the generation origin (manual versus computer 

generated) of orders should never be the basis of discrimination. 
9 

advantages routinely associated with the clearing process. Therefore, block trading of 

large orders on electronic venues is to be encouraged. The entire remainder of this 

section constitutes the subcommittee's recommendation. 

Minimum eligible quantity 

Orders that could be block traded off the electronic market must be of an appropriate 

quantity. The minimum permissible quantity threshold for executing block trades on 

electronic market venues will change as liquidity in that product/market change from 

time to time. In general, the minimum quantity should be large enough that it represents 

a marked departure from the size of otherwise large orders that can be readily observed as 

being executed in that electronic product/market. For an order to be eligible to be block 

traded, it need not be remarkable in size, but its size should be substantial enough that it 

would move the market substantially and that by directing that order to the market, a 

commercial market participant would have every expectation that (1) the market effect 

would be temporarily and unnecessarily disruptive, and (2) the order would likely be 

executed at an average price that would reasonably be deemed to be uncommercial, 

relative to the underlying cash market for that derivative product or with respect to the 

market price for correlative products at that time. 

Status of resting disclosed orders in the order book 

In a single electronic venue, an FCM taking the opposite side of a block trade, should be 

obligated to take out all disclosed resting bids and take the remainder of the orders at the 

block price as principal. Under virtually all (block trade) circumstances, the practice of 

allowing block orders to take out resting displayed orders at their respective limit prices 

would serve to the detriment of those affected market participants (when compared to the 

subcommittee’s subsequently suggested alternative), rendering their resting orders as 

veritable "market road kill" by block trades which were never even displayed in the order 

book. Market participants should receive incentives for leaving resting orders in the 

order book and not be penalized. 

The subcommittee’s approach distinguishes between displayed and undisplayed resting 

orders and rewards the former for their valuable contribution to enhance the price 

transparency of the relevant market venue. The consensus proposal that (in the instant 

example) resting displayed bids get filled at the lower "block" price provides a financial 

incentive to all market participants to enter orders into the order book. In return, not only 

would they not potentially be "run over" by a block trade, but they would also have some 

significant possibility of receiving price improvement at execution. 

It was noted that (in the example developed by the subcommittee) the block seller would 

have access to the same information in the order book that every other market participant 

would have. It is reasonable to assume that any experienced block trader (in our 

example) knows that his/her order is going to take the market down to significantly lower 

levels. Getting the entire order filled at a not unreasonable average price is of paramount 
10 

importance; otherwise the block seller’s request of an FCM for a block trade quote would 

not have received serious consideration. 

First and foremost, the block seller always has the option of entering a market sell order 

into the order book to take out the resting bids (disclosed and undisclosed) at their 

respective prices6

 or requesting a block order bid from an FCM. If the block seller 

thought that the price improvement that might be gained by entering a large market order 

and subsequently requesting that an FCM provide a quote for a (bid) for the residual 

quantity7 outweighed the likely merits of requesting a block price for the entire quantity, 

the block seller could always do so. Were the block seller to pursue this strategy, the 

block seller would direct the FCM to access the disclosed resting bids in an agency 

capacity to fill a portion of the block trade while filling the remainder of the block trade 

as principal. The disclosed resting bids would be executed at their limit price and thus, 

the FCM would, consistent with its agency obligations, obtain price improvement for its 

customer’s block trade. Such handling of block trades would be consistent with the 

subcommittee’s position that block trades should be encouraged to be executed through 

the electronic venue. 

Undisplayed resting orders (reserves) 

Undisplayed reserves should not be granted equivalent priority to displayed orders when 

participating in an execution of a block trade. Orders eligible for preferred priority 

should be those orders that, as a group were visible (price and actual quantity) in the 

order book. A market venue that provides market participants visibility into a robust 

order book provides significant public benefit. While undisplayed reserves may 

contribute to the liquidity of an organized market venue, by definition, they contribute 

virtually nothing to enhance transparency of the order book. The time priority of 

undisclosed reserves being refreshed after the block trade has been completed is 

addressed in the detailed example. 

 

6

 It is entirely conceivable that some electronic venues’ policies could include the stipulation that market 

orders also take out undisclosed reserves. The subcommittee provides no recommendations regarding the 

public policy implications of permitting undisclosed reserves. 7

 This combination strategy could potentially leave a residual unfilled quantity that would not then satisfy 

the minimum quantity for a block trade. 
11 

Detailed Example 

The subcommittee agreed that the best way to summarize its recommended best practice 

for block trading was to do so with an example that would address all of the issues that 

the subcommittee deemed relevant to recommending a best practice. The reference 

example that was used by the subcommittee focuses attention on the relevant issues and 

is included immediately below. 

The venue for the subcommittee's example is a monopoly market; that is, there are really 

no other electronic (venue) markets that operate during substantially the same time zones 

for a fungible product and that are considered by a significant proportion of commercial 

market participants to constitute a bona fide source of price transparency. The prevailing 

market is xx.24 bid and xx.25 offered. The market is typical; there are bids in the order 

book below the xx.24 bid and offers above the xx.25 offer. Aggregate resting size in the 

book expands the further the bids and offers rest below and above the prevailing market 

price. All market participants that have trading terminals can see the order book five 

prices up and down. 

A market participant, having this information8

 indicated to its FCM that it wanted to 

execute a block sell order having notional value of $5 million.9 Further assume that this 

market venue permits market participants to enter undisclosed reserves10 into the order 

book. Prior to executing the block order, the order book looks like the following: 

 

8

 It is not relevant whether the market participant could see the order book on its own trading terminal or 

whether its carrying broker provided this price/quantity information. 

9

 Assume that a $5 million single order otherwise exceeds any minimum order size for a block order for 

that product / venue. 

10 The Market Access Subcommittee provides no opinion with respect to the potential public costs and 

benefits of permitting market participants to enter undisclosed reserves into the order book of an organized 

market operating in an electric venue. The members of the subcommittee believed that the example needed 

the robustness of undisclosed reserve balances in order to communicate the subcommittee's premise that 

trade matching algorithms should give the highest time/price priority to orders that provide price discovery 

and transparency. Undisclosed reserve balances provide none, and therefore should be subordinate to 

disclosed bids and offers when block trades are being executed. 
12 

Order Book

xx.29 {not relevant to this example} 

xx.28 {not relevant to this example} 

xx.27 {not relevant to this example} 

xx.26 aggregate offers (4) of $34,000 [undisclosed aggregate reserves (3) of $66,000] 

xx.25 aggregate offers (3) of $23,000 [undisclosed aggregate reserves (2) of $50,000] 

xx.24 aggregate bids (2) of $43,000 [undisclosed aggregate reserves (1) of $50,000] 

xx.23 aggregate bids (3) of $65,000 [undisclosed aggregate reserves (2) of $150,000] 

xx.22 aggregate bids (5) of $111,000 [undisclosed aggregate reserves (3) of $250,000] 

xx.21 aggregate bids (7) of $167,000 [undisclosed aggregate reserves (4) of $400,000] 

xx.20 aggregate bids (9) of $222,000 [undisclosed aggregate reserves (6) of $550,000] 

xx.19 aggregate bids (4) of $300,000 [undisclosed aggregate reserves (2) of $500,000]11

The FCM indicates that it would be prepared to execute a block trade for all12 $5 million 

at xx.20. 

The subcommittee's recommended best practice would require the following steps: 

1. The $43,000 bids (2) at xx.24 get filled at xx.20. 

2. The $65,000 bids (3) at xx.23 get filled at xx.20. 

3. The $111,000 bids (5) at xx.22 get filled at xx.20 

4. The $167,000 bids (7) at xx.21 get filled at xx.20. 

5. The $222,000 bids (9) at xx.20 get filled at xx.20. 

6. The $4,392,000 gets block traded (internalized) with the FCM at xx.20. 

7. Trades 1 through 5 would occur on the screen and would be instantly 

transparent to all market participants that have trading terminals.13 It would 

not, at that time, be apparent whether someone simply "turned” the market 

with a large order or whether a block trade was involved.14

8. As soon as practicable, but in any event, not less than 90 seconds later, the 

FCM must submit the block trade to the market venue for retransmission 

(without any delay) through its trade reporting system. At a minimum, the 

transmission must contain at least three elements; the price of xx.20, the 

quantity of $4,392,000 and the time at which the block trade was 

executed.15,16 The market venue must promptly disseminate the blocked trade 

information over its quotation system. 

 

11 Technically, the xx.19 bids would not have been displayed when the market was xx.24 bid / xx.25 

offered as our mythical venue displays bids and offers 5 prices up and down. 12 In our example, however, the actual quantity of the FCM's block trade (the residual) is $4,392,000. 13 Even for market participants that might otherwise only have rudimentary quotation devices (rather than 

trading terminals) the executions opposite the resting bids at xx.24, xx.23, xx.22, xx.21 and xx.20 would be 

displayed in rapid succession, providing reasonable transparency that some form of large sell order was just 

executed. 

14 If the venue had a policy of allowing market and limit orders to take out undisclosed reserve balances, (in 

this example) those market participants that had undisclosed reserve balances to buy (at relevant prices) 

would likely have the first opportunity to realize that the market went through the limit price of their hidden 

reserve balances. That being so, those market participants could logically deduce that the order that took 

out the resting displayed bids but not the undisclosed reserve balances must have been a block trade. 15 From the subcommittee’s perspective, the time at which the (9) resting bids at xx.20 were taken out 

would arguably be the proper start time to report the residual of the block trade. The residual trade should 

be reported as soon as practicable and in no event later than 90 seconds later. 
13 

Time priority for undisclosed reserves 

Assume that after this phenomenon is observed on the screen, the market begins to 

regroup at xx.19 bid and xx.20 offered. The following procedures constitute the 

subcommittee's best practice for handling the undisclosed reserve balances that were 

associated with the various bids at xx.24 through xx.20. 

1. If the bidder at xx.24 that had an undisclosed reserve of $50,000 wishes to 

enter a fully disclosed bid for that quantity ($50,000) or any lesser amount at 

xx.19, its time/price priority should be subordinate only to the (4) prior resting 

disclosed bids for an aggregate amount of $300,000. 

2. If the bidder at xx.24 that had an undisclosed reserve of $50,000 wishes to 

transport its undisclosed bid for that quantity or any lesser amount at xx.19, 

the time/price priority for its undisclosed reserve balance should be 

subordinate only to the (4) prior resting disclosed bids for an aggregate 

amount of $300,000 and the (2) resting undisclosed reserve balances that 

aggregate $500,000. 

3. All other undisclosed reserve balances at xx.23, xx.22, and xx.21 should, as 

groups have new time/price priority in descending limit price order17 and 

within limit price, should maintain whatever time/price priority (relative to 

each other) they had prior to the execution of the block trade. 

Prompt trade reporting 

The firm internalizing the blocked trade has the affirmative responsibility to report the 

price and quantity (but no information respecting the identity of the client) as soon as 

practicable, and in no event, later than 90 seconds after the terms of the trade are 

finalized.18 The subcommittee makes no recommendation respecting the medium over 

which this trade is reported. All organized markets should achieve and maintain the 

highest level of price transparency to its market participants, upon whose order flow the 

market venue is completely dependent. 

 16 If the market venue typically reports opposite clearing firm information on matched trades then the FCM 

executing the block buy trade would receive matched trade confirmation from the order book that it was 

both the buying and selling FCM. If FCM identity information is not otherwise distributed to uninvolved 

third parties (anyone else with a trading terminal) on all other matched trades, it should not be disclosed for 

blocked trades. That is, the provision (or not) of opposite FCM information should be no different for 

blocked trades than for any other matched trades. 

17 Conversely, a block buy order would give priority to the lowest offers firstly. 

18 The subcommittee is aware that the current practices of firms that routinely internalize order flow is 

reasonably disparate. Therefore, some standardization for the reporting of block trades will likely be 

required for all affected firms to be able to comply with the 90 second requirement. A survey of current 

procedures among affected firms would seem appropriate. 
14 

Best practice in multiple market venues for economically equivalent 

products 

Were multiple market venues to concurrently serve as bona fide price discovery centers, 

FCMs have an affirmative responsibility to use their best efforts to direct a customer’s 

orders to the market venue that provides the most favorable terms for the execution of 

that customer’s order (i.e., price, liquidity, cost, speed of execution, etc.). This 

responsibility lies with the FCM, not the organized market operating an electronic 

marketplace. The subcommittee agreed that this process would be extraordinarily 

difficult to automate (or achieve in any unautomated structure) across multiple electronic 

trading venues, absent either mandatory or privately negotiated linkages of market 

centers. 

III. Transparency 

Pre-trade execution 

Electronic markets function efficiently when market participants have the opportunity to 

use transparent market information to make trading and investment decisions, enter 

orders to do so, and achieve predictable results. 

Recommendation III A: Organized markets operating electronic venues should display 

the order book for all products to all market participants without any preference to any 

market participant or class of market participant. If only a portion of the order book is 

displayed, that portion that is disseminated must be disseminated uniformly, and be made 

available to all classes of market participants without discrimination. Informational 

content and timeliness of transmission should not be discriminatory among classes of 

market participants. 

If the relevant organized market charges quotation fees, such fees may differ among 

classes of market participants. 

Post-trade execution

Perhaps the greatest public benefit of all organized markets, including organized markets 

operating in electronic venues is the dissemination of market prices. Organized markets 

focus attention, centrally. All market participants that have an economic interest in a 

particular product/venue can express their market view and the composite of all of those 

views determines a product’s instantaneous fair market value. All interested market 

participants must have equal access to this valuable information. 

Recommendation III B: Organized markets operating electronic venues should not 

disseminate price or price and quantity information with any preference to any market 

participant or class of market participant. Neither the timeliness of dissemination nor 
15 

informational content may differ among market participants or classes of market 

participants willing to pay the same fees to receive the same information at the same 

time.

The subcommittee does not take issue with the practice of some organized markets that 

sell their real-time quotation data for a premium price and a delayed quotation feed at a 

lesser price, nor the practice of charging different fees to provide quotation services to 

different classes of market participants. The subcommittee would, however, take issue if 

an organized market were to decline to provide appropriate quotation data, content and 

transmission speed, at all, to a market participant or class of market participant (that were 

otherwise willing to pay appropriate fees to subscribe to such quotation service). 

IV. Marketmakers

The subcommittee defines "marketmakers" as incented liquidity providers that operate or 

are allowed under a structure administered by an organized market operating an 

electronic venue. Often, marketmakers are granted market access concessions that are 

provided to no other market participants or class of market participants in return for 

providing some minimum market presence, particularly for nascent products which may 

involve a commitment to make continuous 2-way markets with a minimum size, or to 

make markets in times of stress. 

Some organized markets currently provide incentives to marketmakers by providing 

financial incentives and/or informational advantages, including: superior speed of trade 

transmission, reduced fees, and guaranteeing the marketmaker some portion of the order 

flow. Where marketmaker structures continue to be appropriate, organized markets 

should have the flexibility to offer a broad range of incentives to marketmakers. The 

majority of subcommittee members, however, felt that financial incentives alone, should 

be sufficient under most circumstances. 

Marketmaker structures provide a public good by maintaining some defined minimum 

level of market liquidity (presumably when no one else is willing to do so) and often 

contribute to maintaining “orderly” markets. The public is not, however, well served 

when marketmaker structures are not dismantled when market liquidity has been 

established. There may be circumstances where market liquidity is particularly slow to 

develop; therefore, some appropriate criterion of market liquidity, rather than the passage 

of time (exclusively) should determine an appropriate frequency with which the 

continued presence of marketmaker structures should be reviewed. 

Recommendation IV A: An organized market operating an electronic venue should not

operate any order processing system, pass any rule or allow any order processing 

conventions that would otherwise preclude any market participant or class of market 

participant from entering simultaneous 2-way quotes. 

Competition among market participants creates public benefits. To the degree that a 

marketmaker begins to be exposed to legitimate competition from other non-
16 

marketmaker market participants, its continued presence and associated public costs 

should automatically cause the relevant organized market(s) to reassess the 

appropriateness of continuing the marketmaker program for that product. In all cases, 

organized markets should ensure that market participants have access to a description of 

the types of "time and place," informational, and/or financial advantages that 

marketmakers have been granted, (by product or product type, should marketmaker 

advantages differ by product type). 

Recommendation IV B: An organized market operating an electronic venue should not, 

other than under unusually illiquid circumstances, provide privileged market access to 

marketmakers by violating the time/price paradigm within the order book. Under no 

circumstances should any class of market participant’s orders be allowed to violate the 

time/price paradigm, other than orders of marketmakers. 

It is suggested that fee19 or other monetary incentives alone, should provide adequate 

incentive to attract sufficient liquidity provider(s) with far less public costs than violating 

the time/price paradigm. 

Recommendation IV C: The presence and continued rationale of marketmaker structures 

(by product) must be reviewed with a frequency that automatically increases as market 

liquidity in the relevant product increases. The onus should be on the organized market 

to again justify the continued presence of informationally privileged marketmaker 

structures based on economic and illiquidity factors. 

Any appropriate analysis of marketmaker structures should reflect the same public policy 

issues that were addressed when the government established the regulatory structures that 

place limiting parameters on patents and copyrights. National authorities, pursuant to the 

oversight responsibilities delegated to them, should not permit marketmaking structures 

to degenerate into perpetuities, ostensibly levying a permanent parasitic tariff on order 

flow. As liquidity develops with predictable consistency, marketmaker programs must be 

reevaluated to ensure that the public costs (marketmaker benefits) directly or indirectly 

through fee incentives incurred are appropriately proportionate to the public benefits 

received by investors when the marketmaker program was inaugurated. 

Recommendation IV D: Marketmakers serve a beneficial purpose to generate liquidity in 

markets where liquidity has not otherwise occurred naturally. Market makers, in turn, 

should be allowed to earn a not unreasonable, risk adjusted return for their services. A 

market structure that requires marketmakers be “held” for no more than a “one lot” or 

other veritably meaningless quantity should be allowed to earn a concomitantly de 

minimus risk adjusted return on capital. 

 

19 Reference is made to recommendation III A and to Section I, Transparency. Organized markets could 

offer reduced quotation fees to market makers, including a reduced fee structure for bandwidth usage. It is 

reasonable to assume that a marketmaker in an all-electronic venue could incur significant bandwidth usage 

fees. 
17 

The subcommittee members agreed that bona fide competition among electronic venues 

(for products that are economic equivalents) will always ameliorate concerns over 

marketmaker structures continuing in perpetuity. 

Recommendation IV E: If marketmaker structures are not dismantled after sufficient 

liquidity develops, then the quantity for which a marketmaker is held should be 

consistently proportionate to an appropriate liquidity criterion20 for as long as the 

marketmaker structure is perpetuated. 

First and foremost, the subcommittee is strongly of the opinion that marketmaker 

structures should be dismantled once sufficient liquidity develops within a product/venue. 

Structures should be put in place for organized markets and marketmakers to otherwise 

recognize when marketmaker structures are no longer required. One way to provide an 

automated "liquidity reality check" on a marketmaker structure would be to increase the 

quantity for which the marketmaker is held (to provide liquidity) in a manner such that it 

increases linearly as the liquidity in the product increases. At some point, it would 

become obvious even to the marketmaker, that its services are no longer required. At 

some point (arguably a point well beyond the [market liquidity] point at which the 

majority of subcommittee members would have the relevant marketmaker structure 

dismantled), vintage marketmakers would likely abandon their market preference 

anyway, rather than be he held to a quantity three or four orders of magnitude greater 

than the quantities for which they were originally held when the marketmaker structure 

was inaugurated. 

Conclusion

The Market Access Subcommittee has completed its analysis of the public policy issues 

relating to applications of technology to electronic organized markets as such 

applications affect equitable market access, and submits its interim report to the full 

Technology Advisory Committee for its review and acceptance. The interim report 

addresses technology applications prior to trade execution, at trade match and 

information dissemination after trade match. The subcommittee’s guiding principals 

were equity of market access, the considerable value of market transparency, absolute 

parity among all market participants and balancing the public costs of privileged market 

access against the expected public benefits. 

The end product is a compilation of recommendations and best practices for organized 

markets. While it is understood that the instant relevance of the subcommittee’s interim 

report is to the CFTC, specific references to the Commission have been intentionally 

minimized in the interim report to maximize the potential transportability of these best 

practices to organized markets subject to the supervisory oversight of other national 

authorities. 

 

20 Indicative criteria might be volume, average trade size, frequency of quotations (other than by the 

marketmaker) open interest, incidents of block trades, etc. 
18 

The members of the subcommittee wish to join the chair in acknowledging the 

contributions of our industry advisors, Blair Hull and Bill Miller, and thank them for 

sharing their insights and perspectives on these important issues. 

It is our collective desire that the work of the subcommittee be allowed to continue, 

providing the time and resources to examine similar market access issues germane to 

automated market venues. 
19 

Attachment I 

TECHNOLOGY ADVISORY COMMITTEE MEMBERS 

Matthew Andresen 

President 

The Island ECN, Inc. 

David Battan

Vice President and General Counsel 

Interactive Brokers LLC 

Peter F. Borish 

President 

Computer Trading Corporation 

George Crapple 

Co-Chairman and Co-Chief Executive Officer 

The Millburn Corporation 

Daniel Cunningham 

Partner 

Allen & Overy 

John P. Davidson III 

Managing Director 

Morgan Stanley Dean Witter & Co., Inc. 

Yvonne J. Downs 

Senior Vice President of Compliance 

National Futures Association 

Bryan T. Durkin 

Senior Vice President and Administrator 

Office of Investigations and Audits and Order Routing 

Chicago Board of Trade 

Robert Fitzsimmons 

President and Chief Operating Officer 

Nasdaq Liffe Markets 

Richard Friesen 

Chairman and Founder 

ePIT 
20 

Jim Heinz 

Managing Partner 

Marquette Partners LP 

Audrey Hirschfeld 

Senior Vice President and General Counsel 

New York Board of Trade 

Kent Horsager

President and Chief Executive Officer 

Minneapolis Grain Exchange 

Philip McBride Johnson 

Head of Exchange-Traded Derivatives 

Skadden, Arps, Slate, Meagher & Flom LLP 

Scott Johnston

Managing Director and Chief Information Officer 

Chicago Mercantile Exchange 

Anthony Leitner 

Managing Director and General Counsel for Equities 

Goldman Sachs 

John W. McPartland 

Capital Markets Advisor to the 

 Federal Reserve Bank of Chicago and the 

 Center for Law and Financial Markets 

Hank Mlynarski

President 

BrokerTec Futures Exchange LLC 

BrokerTec Clearing Company LLC 

Laurence Mollner 

Managing Member 

Mariah Trading Company LLC 

Brett Paulson 

Senior Vice President and Chief Information Officer 

Board of Trade Clearing Corporation 

Robert R. Petersen

President and Chief Executive Officer 

Kansas City Board of Trade 
21 

Kenneth M. Raisler 

Partner 

Sullivan & Cromwell 

Edward J. Rosen 

Partner 

Cleary Gottlieb, Steen & Hamilton 

Tom Thornton 

Managing Partner 

divine interVentures, Inc. 

Neal Wolkoff 

Executive Vice President 

New York Mercantile Exchange 
22 

Attachment II 

MARKET ACCESS SUBCOMMITTEE MEMBERS, AND INDUSTRY 

ADVISORS 

MEMBERS 

David Battan

Vice President and General Counsel 

Interactive Brokers LLC 

Chris Concannon 

Vice President of Business Development 

The Island ECN, Inc. 

Jim Heinz 

Managing Partner 

Marquette Partners LP 

Scott Johnston

Managing Director and Chief Information Officer 

Chicago Mercantile Exchange 

Anthony Leitner 

Managing Director and General Counsel for Equities 

Goldman Sachs 

John W. McPartland (Chair)

Capital Markets Advisor to the 

 Federal Reserve Bank of Chicago and the 

 Center for Law and Financial Markets 

INDUSTRY ADVISORS 

Blair Hull 

Matlock Capital LLC, and 

Founder of Hull Trading Company 

William Miller 

Independent Risk Oversight Officer, Commonfund Group, and 

Chairman, End Users of Derivatives Council