Winnipeg commodity exchange ICE Futures Canada will now review claims of errors in options trading on a mistake-by-mistake basis, rather than cancel only those alleged bloopers beyond a hard margin of error.
In a memo to participants dated Wednesday, the exchange said it has revised its error trade policy (ETP), most notably so that options will no longer have a defined “no cancellation range.”
Instead, an alleged option error will be reviewed by comparing the traded price to the approximate fair market value of the option at the time of the trade.
In determining “fair market value,” ICE Futures Canada said it will include various pricing components, “including but not limited to implied volatility and the underlying futures price.”
When that fair market value is calculated, the exchange will then decide whether the price of the alleged error is “substantially divergent” from that fair market value.
ICE also warned that the time that elapsed between the alleged error and the notification given to ICE’s market supervision office will be “a component” in that decision making process.
Thus, if an error occurs either in futures or options trading, it’s important for participants to contact the market supervision office “as soon as possible” to get the review process started.
“Each alleged option error will be assessed on its own merits, although typically the price of an alleged error will need to be at least 20 per cent divergent from fair market value to be considered for cancellation,” the exchange wrote in its memo.
For futures trading, however, ICE Futures Canada’s ETP will keep the “no cancellation range,” and gives traders five minutes from the time of an alleged error to report it. The ICE trading platform sets a “price reasonability limit” for futures during trading, to prevent what it calls “fat finger” type errors, the exchange said.
The exchange also warns that any trade where the only error is the number of contracts traded and not the price at which they’re traded “will not be subject to cancellation.”
For more information, exchange participants are asked to contact Steve Teller or Wenzel Lieb at 204-925-5000.