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Futures shock for block-trade resisters

CBOT, which bars futures block trading, remains its strongest opponent – most recently complaining about a rival’s reporting-time rules. Is this an objection to deals that make the market less transparent or a backstop defence of CBOT’s pit traders? And can it hold out against a strategy widely regarded as vital to modern markets?

The controversy over block-trading regulations in the futures market has been reignited by the condemnation of BrokerTec Futures Exchange's (BTEX) block-trading rules by chairman of the Chicago Board of Trade (CBOT) Nickolas Neubauer.

BTEX is a two-year-old electronic futures exchange that trades US treasury futures whose rules allow a relatively long time period before block trades are reported to the market.

Block trading allows market participants to negotiate and execute large trades privately off-exchange for a single price without immediately revealing the details to the exchange. By handling the trade privately, the parties are not forced to unbundle the transaction and execute it piecemeal over time, a practice that risks prices changing before the trade is complete. Market participants and industry lobby group the Futures Industry Association (FIA) view such transactions as an absolute necessity because they enable the execution of extremely large orders at a single price and allow the rolling over of positions without risking price slippage.

In his mid-year CBOT chairman's report, Neubauer expressed the view that BTEX's rules on disclosure of block trades were an example of opaque trading that could "result in illegal activities at worst and improperly functioning markets at best".

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