Orderly Markets

Orderly markets
An orderly market should reflect the normal interplay of buying and selling interest in the instruments involved, and any resulting trades should be subject to the standard pricing mechanisms of the market place concerned.
A disorderly market, such as one that sustains huge price swings for no apparent reason, is of little practical use to participants and of course exposes them to very considerable risks. Therefore it is of importance that those operating the market implement and enforce a code of dealing practice that deters abuse and unjustifiable discontinuity. If this is not the case, the market concerned will lose liquidity, as buyside and sellside alike take their business elsewhere.
In some cases, the sort of practices that can result in disorderly markets are clearly deliberate - such as issuing false or misleading statements in order to induce other participants to buy or sell. However, in other cases, market disruption may be caused more by oversight or carelessness, rather than deliberate malpractice. An example of this might be an automated trading model that placed numerous limit orders in the market, but which had a withdrawal timing parameter that was accidentally set too low. As a result, other market participants would see limit orders flashing on their screens but almost simultaneously disappearing before it was possible to trade against them.
At the most fundamental level, an orderly market requires a detailed and clear dealing code. This needs to cover topics such as matching priorities, and procedures around order entry and withdrawal. The increasing popularity of automated trading has spawned a further set of considerations that must be catered for. What percentage of the orders submitted by participants can reasonably be expected to result in a trade? What is the minimum amount of time that bids and offers must be left in the market to allow other participants an opportunity to trade against them?
While developing and enforcing a code of practice that addresses this type of issue is obviously desirable, it is not a remedy in itself. It does not, for example, automatically excuse the operators of a market from providing sufficient contingent infrastructure capacity to cover periods of intense market activity.
While market operators clearly have a major role in ensuring orderly markets, market participants must also shoulder their share of the burden as well. It is worth observing that many of the major disruptions in financial markets in recent years (eg. Sumitomo, Barings etc) were due to failures of operational controls in the financial institutions for which the traders worked. Some level of interaction with market operators is clearly desirable. While the market operator can insist upon measures such as the appointment of a single individual responsible for a trading floor's compliance with dealing rules, this can only be part of the picture. Financial institutions will still have to adopt and maintain good practice in other related areas, such as segregation of duties.