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A French high-speed trading firm has urged Europe’s top markets regulator to close what it says is a loophole at futures exchange Eurex that gives some traders an “unfair” advantage.
Paris-based Mosaic Finance, which specialises in trading derivatives, has called on the European Securities and Markets Authority to end a “significant” flaw in the German exchange’s systems that it claims has existed for three years and allows some traders to break the exchange’s rules.
It said some traders were able to bypass Eurex’s monitoring system, which checks incoming orders against its rules, by sending “corrupted” data orders that did not conform to the exchange’s standards and were therefore not spotted by the system.
This, said Mosaic, means traders can bombard the exchange with “tens of millions” of orders per second, far in excess of Eurex’s limit of 30,000 per second, without being detected. This gives them a much greater chance of being first in the queue for new trades, the firm added.
Eurex said: “The allegations from this individual trading participant are unfounded and all substantive concerns raised have been repeatedly reviewed.” It added that “none of the issues raised proved to have merit.”
“Our monitoring and analysis have not indicated that the algorithms used by trading participants are incompliant with the rules or would disrupt trading or our monitoring,” Eurex added. “If hypothetically one of the algos would disrupt Eurex’s network monitoring, Eurex would promptly prohibit the use of such an algorithm.”
The advantage “is huge”, Hugues Morin, Mosaic’s founder and president, told the Financial Times. “We are talking about nanoseconds, but if you have a three- to six-nanoseconds advantage it changes the game completely.
“[If] you build the strongest weapon . . . then the only solution the others have is to cheat.”
The accusation against Eurex, the main market for trading futures and options on German debt and Eurozone interest rates, highlights the extent of the technological arms race underpinning much of modern trading.
High-speed traders use complex algorithms to exploit price discrepancies between different venues. They spend large sums on infrastructure such as microwave and short wave connections, and fibre optic cables, to try and trade faster than rivals, with even minuscule time differences offering a potential profit.
Mosaic said it had been putting its case to Eurex since 2022 and last month wrote a letter to Esma asking for an “immediate prohibition of the corrupted practice”. Esma declined to comment.
Morin said in 2022 it became more difficult to trade at Eurex, and so he began to investigate why.
The trading firm bought the same equipment Eurex used for monitoring, from US company Arista Networks, and created its own corrupted data packets in order to test the system. Morin said they were not flagged as a breach.
“[We] made extensive tests on it and found a way to perform small corrupted messages which were not detected by the equipment, and that explained everything,” he said.
Mosaic is urging regulators to stop this practice and said it had previously contacted Germany’s BaFin and France’s AMF regulators about this. AMF declined to comment. BaFin did not respond to a request for comment.
“It is not only a moral question, it is essentially a financial question,” Morin said. “This has affected us financially very strongly.”
