Self-match prevention

The primary intent of self-match prevention is to deter market manipulation. In less-regulated markets that lack self-match prevention, traders may exploit self-matching trades to create an artificial appearance of volume or interest in a security. Additionally, self-match prevention helps reduce transaction costs for participants by netting out orders, preventing them from incurring fees on both trades. While some venues may not enforce self-match prevention for regulatory reasons, they may still offer it as an optional feature.

Self-match prevention is typically implemented by allowing users to tag their orders with a unique identifier at the time of entry. This identifier signals the matching engine not to match two orders that share the same tag. When the engine detects a potential self-match, it intervenes and takes predefined actions, such as canceling one of the orders or reducing the size of the involved orders. The order entry protocol often permits users to specify their preferred action.

Self-match prevention may have different names across trading venues. For example, on the Intercontinental Exchange, it is referred to as Self-Trade Prevention Functionality (STPF), while the London Metal Exchange uses the term Self-Execution Protection (SEP).

While self-match prevention facilitates entering new orders and canceling existing ones simultaneously, it can also be exploited for spoofing or creating misleading signals of liquidity. A market participant may place large orders tagged for self-match prevention to artificially inflate market interest, enticing other participants to join the apparent trend. Subsequently, they can cancel these orders and execute aggressive trades against those who followed the misleading signals. Since self-match prevention is atomic, this process occurs instantaneously, leaving little time for other market participants to react to the cancellations.

When developing trading algorithms or systematic trading strategies, it's crucial to avoid inadvertently exploiting self-match prevention features, as this could result in enforcement action from regulators.

Self-match prevention is one of several risk controls mandated by MiFID II and MiFIR, specifically outlined in Articles 17 and 48. Other mandated controls include price protections and circuit breakers.