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The case of a stockmarket order executed at an unrepresentative price – Euronext can cancel transactions in special circumstances

Published on November 17, 2017

Euronext has the power to cancel transactions that have already been executed. Often overlooked, this power may be exercised by the market undertaking either on its own authority or at the request of one of its members . The Paris Stock Exchange is bound by a set of AMF-approved rules designed to ensure orderly markets and secure transactions. This month’s case offers an opportunity to review the framework of Euronext’s powers, specifically with regard to a transaction executed at an unrepresentative price.

The facts

On 3 May 2017, Mr D placed two buy orders for a leverage certificate[1] that were partially filled the same day at €0.03. Later that same day, he discovered that the transactions had been cancelled.

When he complained, his financial intermediary said that the transactions had been cancelled by Euronext, the market undertaking.

Mr D. disputed the cancellation and turned to me for help, asking for his orders to be treated as duly executed.

The analysis

According to Euronext’s market rules[2], which are posted on its website, the market undertaking is allowed in certain situations and subject to certain criteria to cancel transactions that have already been recorded.

Zone de Texte: Article 4403/3 Book 1 – Euronext market rules

The Relevant Euronext Market Undertaking may cancel Transactions on its own authority if they have been made: 
(i)	in violation of the Rules, particularly those Rules relating to the principles of fair, orderly and efficient market operation; or
(ii)	under improper trading conditions; or
(iii)	further to a manifest material error. 
The power to cancel Transactions on Euronext’s authority shall encompass order-book and off-order book Transactions. 
In addition, and upon request of one of the counterparties: 
(i)	Euronext may, for certain kinds of Securities defined in a Notice, cancel Transactions executed at an aberrant price; or
(ii)	Euronext may cancel Transactions with the agreement of the other counterparty(ies), based on explanations provided by the member concerned. […]
Specific provisions set out in Euronext Notice N4-02[3] also govern the cancellation of transactions.

In this instance, after reviewing the materials provided by Mr D, and particularly the document sent by Euronext to his financial intermediary, I saw that his orders had been cancelled because they were executed at an “unrepresentative price”.

On reviewing the pricing history, I found that the execution price for Mr D’s orders (€0.03) was approximately 100 times lower than the previous day’s price and the prices on the following days, which were around €3. Accordingly, it did not strike me as strange that Mr D’s orders might have been cancelled for the reason given.

To round out my analysis, for information purposes only, I contacted the market undertaking, which provided me with the following information.

Euronext told me that the transactions covered by Mr D’s complaint were cancelled on the same day at the request of the liquidity provider[4] for the financial instrument in question. The request was submitted following a pricing error on the part of the member, indicating that the price should have been €3 instead of €0.03.

I asked the market undertaking why reservation thresholds[5], which are used to halt trading in the event of excessive price fluctuations, were not activated in this case. Euronext explained that for this kind of certificate, reservation thresholds are determined with respect to the liquidity provider’s bid-offer spread[6].

In the morning of 3 May, following a pricing error, the liquidity provider’s spread was €0.02 / €0.03, with an upper threshold of €0.03 and a lower threshold of €0.02. This therefore allowed transactions at €0.03, resulting in trading at unrepresentative prices.

In this case, the market undertaking told me that after reviewing the cancellation request, and in accordance with the provisions of Article 4 (ii)c of Euronext Notice 4-02[7], the criteria taken under consideration included the following:

  • Quotes by the liquidity provider at the close on 2 May, namely €3.13/€3.18.
  • The variation in the financial instrument’s underlying between 2 May and 3 May 2017 (little change, not warranting such a steep decline)

Based on these factors, Euronext told me that it had confirmed that the fair market price on 3 May was €3 as indicated by the liquidity provider. It also said that notification had been sent to each of the affected counterparties, informing them that the transactions in question had been cancelled. This notification was sent to Mr D by his financial intermediary.

The recommendation

Based on all the information, insofar as Mr D’s orders were cancelled in accordance with the market rules, I told Mr D that I had no evidence to challenge the cancellation and uphold his complaint.

Lesson to be learned

Although cancellations by the market undertaking account for a marginal share of the total number of transactions executed every day and involve exceptional situations where the unrepresentative nature of the transaction price can be demonstrated, investors need to be aware that this mechanism does exist.

At the same time, however upsetting it may be for an investor to be faced with this kind of situation, it is important not to lose sight of the fact that this power and the market rules more generally are first and foremost intended to guarantee the reliability of transactions and ensure fair and orderly trading.

 

[1] A leverage or short certificate can be used to make a leveraged investment in an underlying asset (e.g. index, commodity, equity) and amplify the daily variations of that asset without having to own it. A leverage certificate lets the holder tap into increases in the underlying while a short certificate is used to take advantage of decreases.

[2] Euronext operates five securities markets, in Amsterdam, Brussels, Lisbon, London and Paris. It also operates four derivatives markets, in Amsterdam, Brussels, Lisbon, London and Paris. The Euronext Markets are Regulated Markets as defined by the Markets in Financial Instruments Directive (MiFID) and are governed by harmonised rules as well as non-harmonised local rules, which are implemented by means of instructions (Notices). Jurisdiction rules apply based on the location of the securities market in question.

[3]Euronext Notice 4-02

[4] A liquidity provider, often the issuer, signs a commercial agreement with Euronext in which it agrees to quote two-way bid and offer prices with a minimum capital amount (set number of securities or capital) and a maximum spread (usually a percentage).

[5] Euronext may temporarily suspend trading in a security if a buy or sell order, if executed, would cause trading at prices in excess of limits known as “reservation thresholds”.

[6] The spread measures the percentage difference between a buy order and a sell order in the order book. The liquidity provider maintains the spread.

[7] The Relevant Euronext Market Undertaking may determine that a trade has been executed at an unrepresentative price, when:

(ii) Due to exceptional circumstances, it determines that the Automated Price Controls have temporarily failed to reflect fair value for the relevant product. Such assessment of fair value for the relevant product may take into account one or both of the following:

c. In relation to covered warrants and certificates, historical quotes of the Liquidity Provider and variations and volatility noticed on the underlying of such instruments;

 

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