Smoking

Definition

posting orders to trade, to attract other market participants employing traditional trading techniques (‘slow traders’), that are then rapidly revised onto less generous terms, hoping to execute profitably against the incoming flow of ‘slow traders’ orders to trade

Surveillance

Effective implementation of surveillance alerts for smoking requires capturing the following trade data:

  • quote and order data, including unexecuted quotes / orders

  • trade data

It is critical that timestamps are accurate to allow for reconstruction of pre-trade behaviour.

Alerting logic may look for quote cancellations and revisions following immediately client enquiries or requests to trade. It is important to capture informal / indicative quotes which may be displayed on broker screens or via other channels which are not formal trading venues.

Abuse of last look may be a related risk but it is more inherent to fast electronic markets. Both smoking and abuse of last look may relate to situations where a market participant displays quotes which are always on "top of the trading book" but cancels or revises them to less favorable terms upon receiving clients requests to trade.

Regulatory source

Posting orders to trade, to attract other market participants employing traditional trading techniques (‘slow traders’), that are then rapidly revised onto less generous terms, hoping to execute profitably against the incoming flow of ‘slow traders’ orders to trade, usually known as ‘smoking’.

COMMISSION DELEGATED REGULATION (EU) 2016/522, Annex II, Section I, 6 (j)