CFTC Releases Report Regarding Gold Options Trading
On September 28, 1999

WASHINGTON – The Division of Trading and Markets (T&M) of the Commodity Futures Trading Commission (Commission) has sent the Commodity Exchange, Inc. (COMEX or Exchange) Division of the New York Mercantile Exchange (NYMEX) a report of findings and recommendations relating to gold options trading on September 28, 1999.

The gold options market was severely strained last September 28 by an extraordinary spike in volume, volatility and price, accompanied by a more than twelve-fold increase over the normal number of trades processed. T&M undertook a study of those events to determine whether orders were received, executed, and cleared in accordance with Exchange trading rules; whether systemic problems were revealed; and what corrective steps, if any, should be recommended to ameliorate the impact of such market conditions should they recur.

T&M found that overwhelming order flow caused problems with order prioritization, execution, reporting, and clearing. Futures commission merchants interviewed by Division staff, however, generally agreed that gold options floor brokers generally performed acceptably under the circumstances of the day in executing as many orders as they could, particularly given the extremely large increase in the normal number of trades. T&M found that the most persistent problem involved processing those trades through the Exchange’s trade matching system. In this regard, many trades matched properly, but were sent to the wrong clearing members for clearing and thus "miscleared."

To help the Exchange handle such market conditions better in the future, T&M recommends that the Exchange adopt or upgrade various computer technologies for processing and recording gold options trades. In addition, T&M recommends that COMEX develop a mechanism to determine the extent and location of miscleared trades in high volume situations, hold special sessions to resolve trade processing problems if such market events recur, clarify its rules relating to orders for which brokers may not be liable, and prepare a contingency plan for high volume days.

COMEX will have 60 days to respond in writing to T&M’s recommendations. Copies of the report are available from the Commission’s Office of Public Affairs, Three Lafayette Centre, 1155 21^st Street N.W., Washington, DC 20581, (202) 418-5080, or by accessing the Commission’s website at http://www.cftc.gov/.