An exchange that owns a trading firm on its own market would have to fill that firm last at every price, under a CFTC proposal filed on Wednesday

Put your own trading firm on your own exchange and it goes to the back of the queue. Every price. Every time.

That is the operative sentence in a Commodity Futures Trading Commission proposal filed at the Federal Register on Wednesday morning and publishing on Thursday. Where a designated contract market lets an affiliated principal trading firm trade in its own market, the matching engine would have to fill the bid or offer of any unaffiliated member first at the same price, without regard to time priority, and the affiliate's orders would be filled last at every price level.

Price and time priority is the oldest convention in electronic markets. This proposal keeps the price half and takes the time half away from one class of participant.

The conditions attached

An affiliated proprietary firm could not simply trade. It would have to be a quoting market maker, and the exchange would have to run a programme that spells out its obligations.

That programme would have to require continuous two-sided quotes in every product the firm makes a market in, specify how many hours of the trading period the obligation runs for, put limits on permissible bid-ask spreads, and bar the firm from taking directional proprietary positions other than in connection with the quoting obligation. An independent third-party regulatory service provider would have to review it and certify to the Commission and to the exchange's board, once a year and in writing, that every condition is met.

The disclosure a customer cannot click past

The retail-facing part is unusually specific for a market structure rule.

Before a customer enters their first order in a session, the electronic interface would have to present a notice saying an affiliate market maker exists, describing the exchange's relationship with it, and disclosing that the affiliate's orders are filled after theirs at the same price. Plain language. In full, not behind a link. Not capable of being dismissed without the customer's affirmative acknowledgment. The exchange would have to require its intermediaries to deliver the same notice through any interface they operate.

Separately, boards would have to be at least 35 percent public directors, executive committees likewise, and the regulatory oversight committee would have to consist of public directors only. A director whose firm takes more than $100,000 a year from the exchange or an affiliate for legal, accounting or consulting work does not qualify as public, subject to a one-year look back.

What the Commission decided against

It considered banning affiliated proprietary trading on an affiliated exchange outright, with no market maker exception at all.

It declined to propose that, on the ground that a genuine market maker supplies liquidity nobody else will, particularly across what the document calls the broad and continually refreshed contract universes characteristic of prediction markets. It also considered a cap on the affiliate's share of volume, and rejected that on the ground that pushing the affiliate to the back of the queue is a self-adjusting limit already: the affiliate fills when nothing competes and recedes when outside liquidity arrives. Comment is requested on both alternatives anyway.

The self-regulatory side of the same document runs on a similar logic. An exchange that examines its own affiliated broker would have to put self-regulatory staff on a separate reporting line, and no self-regulatory organisation could serve as the designated examiner for its own affiliated futures commission merchant.