work-up: when buy/seller meet, they have a free option to trade more volumn than previously disclosed.
it is useful to hide large trades.
There used to be lawsuits between Cantor and BGC, regarding the old and new work-up technology:
Traders in the secondary market for fixed income securities, such as United States Treasuries (e.g., T-bills, notes, and bonds), do not want to reveal the full volume that they are willing to trade at a given price because this information might be used against the trader by other market participants. However, in order to foster liquidity in the market, customers who initiate the trade at a given price are provided with the exclusive option to incrementally increase their purchase volume. [*4] This exclusivity is known as “workup rights.” When given exclusivity, a customer can gradually increase the volume of his purchase while determining how the market is reacting to the purchase before trading further.
In what the parties have referred to as the “old rules” of workup, when the first buyer or seller has completed his transaction, new buyers or sellers are sequentially given, in the order in which they expressed interest, exclusive workup rights. One problem with the old rules of workup was that a few participants could tie up the market for long periods of time. As a result, brokers would, on occasion, engage in side deals to avoid losing business. Cantor presented evidence at trial showing that the old rules led to “chaos” and “pandemonium” when trading volume was heavy.
Because of the problems associated with the old rules of workup, Cantor employees began to develop new rules of workup. In 1994, the new rules of workup were designed to provide exclusivity to an initial pair of market participants, in a manner similar to the old rules of workup. After the initial pair of traders was finished, orders that were placed while the initial pair had exclusivity would then [*5] be rapidly executed in time priority order. Thus, by limiting exclusivity to the first pair of traders, the new rules of workup still provided an incentive for the first pair of traders to create liquidity while at the same time avoiding a long queue of traders waiting for their chance to trade.
A lot of people are whining about “priority” based trading protocol, and favor FIFO. Futures markets seem to take more recent tech and adopt FIFO; while cash markets still favor old protocol and be political to protect the floor traders/ specialists.
copied a few lines from elitetrader forum:
A few specifics on how the eSpeed and BTEC bond trading rules are f#cked up:
1. Work Up: If you are alone on the 6 offer and I buy the 6’s from you, the trade enters a work up period. BAsically, for the next “x” seconds (with x constantly changing on their whim); you and I have exclusive rights to trade 6’s again. If someone else tries to buy or sell 6’s while we are in work up, they get a ‘come back later’ message. There is more to this rule but this gives you a good idea of work up. It goes back to the days of phone trading where the brokers rewarded the person who just traded by giving them first shot at more.
2. Cancels: If you go 6 bid and become the best bid, you can’t cancel your order for x seconds. Again, x is always changing and it can even vary across instruments (2,5,10, 30).
3. Trading Thru The Stack: This one has changed so often that I no longer know what the rule is, and it varies across maturities a well. If the market is 102 bid, you can not offer or sell (I’ll explain that one next) below 102 to take out the book.
4. Bid/Buy/Offer/Sell: There are 4 order types: Buy, Bid, Offer, Sell. If you are 106 bid, I can go 106 offer and the market will not trade. It will be locked. If the best offer is 107 and I enter a BUY order to BUY 105, I will get rejected because there isn’t a 105 offer. Bid/offer are passive; buy/sell are active. eSpeed has recently changed this and allows bids to be active which begs the question, why not make all orders just buys or sells. Wait this just in, eSpeed changed the rules again so now I have no idea how it works.
The rules briefly described above are all applicable to eSpeed and BTEC with the exception of #3 which may only apply to eSpeed. Oh wait, eSpeed just changed the rules again in the 5-year room!!
I agree with TGM. This model sucks. Hopefully BTEC will go ahead with their ‘futures style’ (FIFO) model and hopefully it will kick the crap out of the old model. I hope this info helps.”
I would say that espeed was great. However, their rules (in my opinion) have not kept up to speed. When all the arbing was done from the espeed and the phone tied to the pit in the CBOT it was great (just 3 years ago–you could still do this). However, now the futures are all electronic and the cash rules based on the past and past technology are antiquated. The reason Brokertec exists is because Espeed would not change. They just try to get political.
In some ways it parallels what is going on with the specialist in the stock market. You know the rules are antiquated and changes must be made but no wants to change and of course everyone becomes a politician.
Our cash market was in place before our futures market. Our futures market then helped our cash market grow TREMENDOUSLY in the 80’s (with the help of govt. spending). Of course you may not know that talking with old dealers.
The new model is based on Eurex. The gov’t. bond market in Europe is the direct opposite. Everything evolved around the BUND (some may argue with me about this) futures and then growing the cash. Cash Dealers here have owned the show and cannot stand the thought of rethinking things because of futures. FIFO and electronic trading platforms is one of the reasons US fixed income markets are growing. They need to rethink things on the cash side.
TT has a solution with Brokertec that could be a knockout blow. Many new desk dealers like it (behind the scenes). However, you are dealing with some dealers that do not want to budge and give up what they think are eternal rights to certain protocols (that can be a big edge).
There are legitimate questions regarding diff. liquidity pools. However, lets be real, they can solve that. It should get interesting. They will have to change. Of course, this is just my opinion, anyone else feel free to chime in. All the younger (under45) cash traders tend to agree. It is SOOOO much easier following the futures protocol.
BrilliantEyes' Blog 