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The French high-speed trading company has urged Europe’s top market regulators to close what it says is a loophole in the futures exchange eurex that gives some traders “unfair” advantages.
Paris-based Mosaic Finance, specializing in trading derivatives, is calling for European securities and market powers to have a “significant” flaw in the German exchange system for three years, allowing some traders to break the rules of the exchange.
Some traders said they were able to bypass Eurex’s surveillance system. This is to check for incoming orders against that rule by sending “corrupted” data orders that were not discovered by the system because they are not compliant with the exchange standards.
This means that, according to the mosaic, traders can attack exchanges with “tens of millions of orders” per second. This makes them much more likely to be first on the queue for a new deal, the company added.
Eurex said: “The allegations from this individual transaction participants were unfounded and all substantial concerns raised have been repeatedly reviewed,” he added, “None of the issues raised have been proven to be merit.”
“Our surveillance and analysis does not show that the algorithms used by trading participants are violating the rules or disrupt trading or monitoring,” Eurex added. “If one of the algorithms hypothesizes disrupts eurex’s network monitoring, eurex will promptly ban the use of such algorithms.”
Hugues Morin, founder and president of Mosaic, told The Financial Times. “We’re talking about nanoseconds, but if there’s a 3-6 nanosecond advantage, we’ll change the game completely.
“(If) build the strongest weapon. … And the only solution other people have is to cheat.”
The accusations against Eurex, the leading market for trading futures and options on German debt and eurozone interest rates, highlight the scope of the technological weapons race that underpins much of modern trading.
Fast traders use complex algorithms to take advantage of price discrepancies between different venues. They spend a lot of money on infrastructure such as microwave and shortwave connections, fiber optic cables, and try to trade faster than their rivals, and are also a time difference in how they can potentially benefit.
The Mosaic said it had published the case on eurex since 2022, and last month wrote to Esma calling for an “immediate ban on corrupt practices.” ESMA declined to comment.
Morin said it was more difficult to trade with Eurex in 2022, so he began to investigate why.
The trading company purchased the same equipment used for monitoring from the US company Arista Networks and created its own corrupted data packets to test the system. Morin said they were not flagged as a violation.
“(We) did extensive testing and found a way to run a small, corrupted message that was not detected by the equipment. It explained everything,” he said.
The Mosaic has urged regulators to stop the practice, saying it had previously contacted German Baffin and French AMF regulators about this. AMF declined to comment. Bafin did not respond to requests for comment.
“It’s not only a moral issue, it’s a financial issue inherently,” Morin said. “This had a very strong financial impact on us.”
