> For the complete documentation index, see [llms.txt](https://initiativ.gitbook.io/initiativ/llms.txt). Markdown versions of documentation pages are available by appending `.md` to page URLs; this page is available as [Markdown](https://initiativ.gitbook.io/initiativ/mm_internal/retained-from-version-0.1-not-yet-reworked/v01-10.6.2-order-validation-and-order-entry-controls.md).

# (v01) 10.6.2 Order Validation and Order Entry Controls

The Exchange employs a two-layer control framework to ensure order integrity. Order Validation (Section 6.2) performs hard checks on resource availability, permissions, and account status—orders failing these checks are rejected outright and cannot enter the Order Book. Order Entry Controls (Section 6.3) perform soft checks on order reasonableness and potential errors—orders triggering these checks generate warnings or require user confirmation before proceeding, but are not automatically rejected.

## Order Validation

All Orders are subject to pre-trade validation prior to entry into the Order Book. These are hard checks—orders failing any validation criterion are **automatically rejected** without user intervention. The Exchange validates each Order against the following criteria:

* **Trading Limit Verification**: The Order must not cause the Member’s Trading Limit to be exceeded. For buy Orders, the system verifies sufficient Cash Balance and available Trading Limit exist to support the Order value plus applicable fees. For sell Orders, the system verifies sufficient Inventory exists.
* **Maximum Quota Verification**: The Order must not cause the Member’s Maximum Quota (inventory limit) or Maximum Financial Quota (cash limit) to be exceeded.
* **Participant Sub-Limit Verification**: Where Participant-level sub-limits have been configured, the Order must not exceed the Participant’s allocated sub-limit within the Member’s overall Trading Limit.
* **Eligible Markets Verification**: The Order must be for an instrument within the Member’s Eligible Markets as configured by the Administrator and approved by the Exchange.
* **Account Status Verification**: Orders are rejected if the Member is suspended or restricted, the Participant lacks active permissions, or there are outstanding compliance issues.

Orders that fail any validation check are rejected and are not entered into the Order Book. The submitting Participant receives immediate notification of the rejection with the specific reason.

## Order Entry Controls

Since trade cancellations are not permitted, the Exchange maintains comprehensive order entry controls to prevent erroneous orders and maintain orderly trading. These are soft checks designed to flag potentially suspicious orders for user review rather than automatic rejection.

### Two-Tier Safety System (Fat-Finger Prevention)

The Exchange employs a two-tier safety system to prevent erroneous order submissions. The first tier activates when potential inconsistencies are detected, such as unusual price levels, large order sizes, or orders that would consume substantial Trading Limit. When triggered, the Participant receives a warning prompt to review the order details before submission. The Participant may confirm or amend the order.

As an additional layer of safety, once an order passes entry controls, the user is presented with an order review screen for final approval before the order becomes active in the Order Book.

{% hint style="warning" %}
**\[DECISION REQUIRED]**: Should the order review screen be optional (configurable per Participant or Member organization)? Should it not apply to Market Makers to preserve quoting speed?
{% endhint %}

### Entry Control Checks

The Exchange implements multiple automated checks to flag potentially erroneous orders:

#### Price Collars (Dynamic)

Orders with limit prices deviating excessively from the current reference price trigger a warning or are automatically rejected depending on the severity of deviation. Price collar thresholds are calculated as a function of recent price volatility to adapt to market conditions:

> Collar Width = Base Percentage + (Volatility Multiplier × Recent Volatility)

Where:

* Reference Price = \[last trade price / mid-point of best bid-offer / most recent Settlement Price]
* Recent Volatility = \[standard deviation of prices over prior X minutes / intraday price range / other methodology]

During periods of low volatility, collars may be as narrow as \[±X%]. During heightened volatility, collars may widen to \[±Y%].

{% hint style="warning" %}
**\[DECISION REQUIRED - Item 20]**: Specify exact formula parameters (e.g., “Base = 5%, Volatility Multiplier = 2x, Lookback = 30 minutes”).

**\[DECISION REQUIRED - Item 21]**: Define collar width ranges and volatility thresholds.
{% endhint %}

#### Format and Completeness Checks

Orders are rejected outright for zero price or zero quantity entries, incomplete order details (missing required fields), invalid instrument, and format violations or non-conforming tick sizes.

#### Business Logic Validation

Orders must comply with order type-specific rules. Orders violating these rules are rejected outright: Market orders cannot have GTC time-in-force, Iceberg orders must be Limit orders, TAS orders only during permitted hours, and other instrument-specific requirements.

#### Treatment of Failed Checks

Orders that fail entry controls receive different treatment depending on the check type. Hard failures (format errors, business logic violations, extreme price collar breaches) result in outright rejection with a specific rejection reason provided to the Participant. Soft failures (suspicious but potentially legitimate orders) trigger warning prompts requiring user confirmation before the order proceeds. This layered approach balances safety with flexibility for sophisticated trading strategies.

For detailed validation rules, see Appendix B: Order Entry Controls and Validation Framework.