Triangulation

This topic provides information on Triangulation.

Triangulation provides liquidity between premium-quoted options (PQO), volatility-quoted options (VQO), and the related underlying futures market. Liquidity across order books is supported by implied functionality and standard option pricing model calculations.

Contents

Testing and Certification

Certification via AutoCert+ is not required for Triangulation functionality.

Functionality Overview

This diagram provides an overview of Triangulation functionality.

Product Availability

Market Data

Triangulation functionality has the following market data considerations.

Security Definition

The market data Security Definition message (tag 35-MsgType=d) will contain tag 872-InstAttribValue bit 19-Implied Matching Eligible=1 for VQO, PQO, and futures products with Triangulation, irrespective of whether a strike is inside or outside the configured Triangulation delta range configuration.

Delta Range

At the start of a trading session, the initial Triangulation delta range will be configured to only include strikes from 10 delta to 80 delta for Triangulation VQO books. No other strikes will be eligible for Triangulation throughout the trading day.

During the course of the trading day, Triangulation calculation and matching can range from 10 delta to 90 delta as CME Globex dynamically recalculates all option deltas.

Triangulation implied calculations and market data dissemination can activate/deactivate for a given strike during the course of the trading day as CME Globex dynamically recalculates all option deltas.

Beginning of the trading day

Example 1

Delta value changes during the trading day

Example 2

Example 3

Example 4

Market and Instrument States

Implied ON/OFF Security Status messages (tag 35-MsgType=f) WILL NOT be sent for Triangulation products.

Triangulation Book Dissemination

Only top-of-book, best bid, and best offer are disseminated for Triangulation VQO books via the Market Data Incremental (tag 35=X) message with tag 269=E (Implied Bid) or F (Implied Offer) for VQO outrights. VQO Triangulation function implieds will only be published when the related PQO and futures books can both support the VQO 5-lot minimum quantity.

There is no top-of-book Triangulation implied dissemination for the PQO and futures books because aggressing customer orders against PQO or futures Triangulation implied orders will not always fulfill a related VQO 5-lot customer order minimum match event size. 

Trade Summary

When a Triangulation implied order matches, Trade Summary messages will be published on each of the channels for the VQO, the PQO and the futures.

• The VQO and PQO market data messages will be published on PQO channel.
• The futures market data messages will be published on the futures channel.

A client representing a VQO customer order, PQO customer order or a futures customer order will not be able to determine from market data messages whether the orders are matched as part of a Triangulation implied match. There is no market data message value to indicate implied match.

Mass Quote Protections

To prevent over-filling across resting mass quotes in multiple Volatility-Quoted Options (VQO) and Premium-Quoted Options (PQO) strike prices, Mass Quote Protections (MQPs) are evaluated inter-event for a Triangulation implied trade originating from an aggressing futures order.

Mass Quote Protection Calculation

The following examples illustrate MQP calculations for Triangulation implied trades that occur in the futures order book. 

The examples on this page show scenarios in which this feature will apply.

Example 1 – New Quote Fill (X) Protection

Given

A futures Sell aggressing order arrives for Qty 100@9030, the order can trade with all resting implied orders.

Then

CME Globex creates 3 trades:

• The transaction is stopped after execution of trade 2, since it violated the MQP setting limit for Market Maker 1
• VQO 9070 MQ (Bid and Ask) is eliminated because of the MQP activation, which also cancels implied 3
• VQO 9050 and 9060 Bids are cancelled

Example 2 – Execution (Y) Protection

Given

• Futures Sell Aggressor 1 arrives for 10@9030 – can trade with implied 1.
• Futures Sell Aggressor 2 arrives for 50@9030 (within MQP interval).

Then

CME Globex creates 5 trades

• Implied 1 trades with multiple aggressors within MQP interval
• Each aggressor fill is counted in execution protection
• Implied 2 trades with the same aggressor for qty 20 and 20, but execution protection is counted as 1 and not 2
• Will stop the execution after Implied 2 trade, since it violated MQP
• MQP activates after implied 2 is completely traded
• VQO 9070 MQ is cancelled, so implied 3 is cancelled
• VQO 9050 bid and VQO 9060 bid are cancelled
• The changes related to per aggressor count are applicable only for the triangulation implied futures

Example 3 – Traded Quantity (Z) Protection

Given

Futures Sell aggressor arrives for qty 50@9030 and can trade with all resting implieds.

Then 

CME Globex creates 4 trades:

• Implied 1 fully trades
• Implied 2 has multiple fills – trade 2 and trade 3
• Though MQP is violated after trade 2, trade 3 also goes through since the implied order from the same MQ is traded
• Will stop the execution after trade 3 since it violated MQP
• MQP activates after implied 2 is completely traded
• VQO 9070 MQ is eliminated, so implied 3 is cancelled
• VQO 9050 Bid and VQO 9060 Bid are cancelled

Example 4 – Buy/Sell Protection

Given

Futures Sell aggressor arrives for qty 100@9030 which can trade with all the resting implied orders.

Self Match Prevention is not available for Triangulation.

Triangulation Implied Functionality

Triangulation only functions when the PQO quantity is at least a minimum quantity and sufficient futures hedge quantity is available.

All Volatility-Quoted Options have a 5-lot minimum order size. These minimums are designed to mitigate the risk of a VQO or Triangulated execution without an assigned future.

The maximum number of deltas that a VQO order can be out due to a Triangulation match is 99 deltas per volatility match level basis.

A Triangulated price is calculated and published as a single price value, but the customer order sources to create a triangulated price can be created from multiple orders and/or multiple prices levels.

Only the following combinations are supported:

1. VQO implied order = PQO customer order + futures customer order
2. PQO implied order = VQO customer order + futures customer order
3. Futures implied order = VQO customer order + PQO customer order

When futures customer order(s) are the limiting factor to create an implied VQO or implied PQO then the following formula will be used to create the implied quantity: 

Implied VQO quantity = Minimum of (PQO Quantity, Calculated Options Quantity*)

Implied PQO quantity = Minimum of (VQO Quantity, Calculated Options Quantity*)

        *Calculated Options Quantity =  Round Down ((Future Quantity + 0.50) / Delta)

Note: If the calculated options quantity results in a positive integer, subtract 1 from calculated options quantity (see Example A below).

When a new customer order enters the futures, PQO, or VQO book, CME Globex first determines:

1. if there are opposite side resting customer order(s) to match against the incoming order, and
2. if Triangulation implied order(s) can match against the incoming customer order.

This table shows all Triangulation implied order matching combinations:

Option Pricing Inputs

Triangulation is only available to European-style options and will use the Black 76 model. Please see Volatility-Quoted Options for more details about the CME Globex option pricing model. 

The following option pricing model’s inputs are consistent regardless of whether the Triangulation implied match occurred in the VQO, PQO or futures book.

Aggregated Price-Time Priority

Order Priority

Among Triangulation implied orders, the order priority is based on Aggregated Price-Time, i.e., the implied order priority will be determined using the last timestamp of the customer orders used to generate the implied.

For example, if a VQO customer order was entered at 12:00:00 p.m. CT and a PQO customer order entered at 12:00:01 p.m. CT, and those orders create an implied futures order, then the related timestamp for the implied futures order would be 12:00:01 p.m. CT, and that implied order would have priority over any implied order with a later timestamp.

Matching Priority

1. Within the VQO order book, at a given price level, if there are both customer orders and Triangulation implied orders, then an aggressing VQO order will match against those orders in the following sequence: 

• VQO customer orders or VQO Triangulation implied  orders based on the Aggregated Price-Time.

2. Within the PQO order book, at a given price level, if there are both customer orders and implied orders (i.e. RFQ-triggered implied orders and Triangulation implied orders), then an aggressing PQO order will match against those orders in the following sequence: 

•  PQO customer orders, PQO implied orders,  or PQO Triangulation implied  orders  based on the Aggregated Price-Time. 

A resting order can match without an incoming (aggressing) opposite side customer order entering its book or any of the related Triangulation books in the following scenario:

Matching Algorithm

Triangulation products will utilize the match algorithm that they currently employ.

CME Globex Processing Overview

Order entry and market data messaging for Triangulation products are standard CME Globex except where noted.

In this example, the bid in the volatility quoted book and ask in the premium quoted book create an undisseminated implied order in the underlying futures 6AH7 bid, which is matched when the client system submits a Sell 10 order in 6AH7.

Triangulation Implied Matching Examples

The following examples show matching behavior for various Triangulation implied scenarios.

Example 1 - Partial VQO Fill, Cancel Remaining VQO Quantity

1. Starting VQO book with a customer bid of 20@15.98 and an implied bid of 20@15.98 (implied order has second priority).
2. Aggressing Ask for 24 at 15.98 hits VQO order book.
3. Aggressing Ask matches for 20 with customer order for 20 at 15.98.
4. Since the remaining Ask quantity of 4 does not meet the minimum VQO order quantity of 5, the remaining order quantity is cancelled.

Example 2 - Partial PQO Fill, Remaining PQO Quantity Rests on Book

1. Starting books with implied Ask order in the PQO book.
2. Aggressing Bid for 24 at .0142 hits PQO order book.
3. Aggressing Bid matches for 20 with customer Ask order. The minimum Triangulation function match quantity is not met. 
4. Remaining Bid quantity of 4 rests at .0142 price level on the PQO book.

Example 3 - Triangulation Implied Match Occurs in VQO Order Book

In this example the available PQO orders and futures order generate an implied Bid order for 22 @ 13.21 in the VQO order book.

1. Starting books with implied Bid order in the VQO book.
2. Aggressing Ask for 22 @ 13.21 hits VQO order book
3. All VQO, PQO, and futures order fill completely in the following sequence:

iLink Messages for Triangulation Match

• VQO Fill: 8 @ 13.21% (ask)
• Premium Fill: 8 @ $0.0142 (ask)
  • tag31-LastPX=$0.0142 | tag 810-UnderlyingPx=$0.7640 | tag811-OptionDelta=0.1132 | tag1188-Volatility=13.21% | tag1189-ExpiraitonTimeValue=x.x | tag1190-RiskFreeRate=x.x%
• Premium Fill: 8 @ $0.0142 (bid)
• Future Fill: 1 @ $0.7639 (bid)
• Future Fill: 1 @ $0.7639 (ask)

• VQO Fill: 3 @ 13.21% (ask)
• Premium Fill: 3 @ $0.0141 (ask)
  • tag31-LastPX=$0.0141 | tag 810-UnderlyingPx=$0.7640 | tag811-OptionDelta=0.1132 | tag1188-Volatility=13.21% | tag1189-ExpiraitonTimeValue=x.x | tag1190-RiskFreeRate=x.x%
• Premium Fill: 3 @ $0.0141 (bid)

• VQO Fill: 11 @ 13.21% (ask)
• Premium Fill: 11 @$0.0140 (ask)
  • tag31-LastPX=$0.0140 | tag 810-UnderlyingPx=$0.7640 | tag811-OptionDelta=0.1132 | tag1188-Volatility=13.21% | tag1189-ExpiraitonTimeValue=x.x | tag1190-RiskFreeRate=x.x%
• Premium Fill: 11 @ $0.0140 (bid)
• Future Fill: 1 @ $0.7640 (bid)
• Future Fill: 1 @ $0.7640 (ask)

Example 4 - Triangulation Implied Match Occurs in PQO Order Book

In this example the available VQO, PQO, and futures orders generate an implied Ask order for 20 @ 0.0139 in the PQO order book.

1. Starting books with implied Ask in PQO book.
2. Aggressing PQO bid for 11 @ 0.0141 hits the order book, satisfying the implied minimum quantity and matching at improved price of 0.0139.
3. Resting order fills:

• • PQO bid for 9 @ 0.0142 matches completely at 0.0142.
  • Resting VQO ask for 20@13.21 fills completely.
    
  • Resting Futures ask for 2 @ 0.7640 fills completely.

     iLink Messages for Triangulation Match

• • VQO Fill: 9 @ 13.21% (ask)
  • Premium Fill: 9 @ $0.0142 (ask)
    • tag31-LastPX=$0.0142| tag 810-UnderlyingPx=$0.7640 | tag811-OptionDelta=0.1132 | tag1188-Volatility=13.21% | tag1189-ExpiraitonTimeValue=x.x | tag1190-RiskFreeRate=x.x%
  • Premium Fill: 9 @ $0.0142 (bid)
  • Future Fill: 1 @ $0.7640 (bid)
  • Future Fill: 1 @ $0.7640 (ask)

• • VQO Fill: 11 @ 13.21% (ask)
  • Premium Fill: 11 @$0.0139 (ask) 
    • tag31-LastPX=$0.0139| tag 810-UnderlyingPx=$0.7640 | tag811-OptionDelta=0.1132 | tag1188-Volatility=13.21% | tag1189-ExpiraitonTimeValue=x.x | tag1190-RiskFreeRate=x.x%

Additional Implied Order Scenarios

The following examples show scenarios in which Triangulation provides implied order quantity in the VQO, PQO, and Futures order book, depending upon book dynamics.

Example A - VQO implied bid

If the delta is 50 then the VQO Put implied bid will be published as a 24-lot: (12-lot futures  + 0.50) / 50 deltas = 2500 deltas (subtract 100 from 2500 deltas or VQO 24-lot implied order).

Example B - VQO implied bid

If the delta is 55, then the VQO Put implied bid will be published as a 22-lot: (12-lot futures  + 0.50) / 55 deltas = 2272 deltas (rounded down to 2200 deltas or VQO 22-lot implied order).

Example C - Futures implied bid

If the delta is 28 then an 8-lot futures will be implied: VQO 30-lot * 28 delta = 840 deltas (rounded down to 800 deltas or 8 futures).

Examples D through F assume the following book dynamics: 

Example D - Futures impiled ask

• VQO Put of 10.10% Ask (20-lot) and PQO Put  of 38 Bid (20-lot) generates Futures Implied Ask of 2 Ask (10-lot)
• Futures goes 2 Bid (10-lot) – resulting matches and market data:

• • VQO 10.10% (20-lot)
  • PQO 38 (20-lot)
  • Futures 2 (10-lot)

Example E - VQO implied bid does not meet minimum quantity requirement

• PQO goes 42 Bid (4-lot); this calculates to a VQO implied Bid of 10.15% (4-lot)
• However, because the VQO implied does not meet the 5-lot minimum, no implied is created and no matching occurs.

Example F - PQO implied ask

Example G - VQO implied bid, cancel aggressing order remainder

If an incoming, aggressing VQO Put Ask 25-lot order enters the CLOB @ 12.20% then:

• the resting VQO Put 20-lot customer order @ 12.20% will fully match
• CME Globex will cancel the aggressing VQO Put Ask order remaining 5-lot.

Below are the rules for how an incoming order progresses through the Triangulation functionality:

1. An incoming customer order is evaluated to match against opposite side customer or triangulation implied order(s) in the same book based on the aggregated price-time.
2. If the incoming customer order has remaining quantity, then it, in turn, is evaluated to create Triangulation implied orders.

• The incoming customer order’s participation as part of the Triangulated implied order action occurs regardless of the customer order’s qualifier instructions (e.g. FOK/FAK instructions).

       3. If the incoming customer order has remaining quantity, then its order qualifier instructions are applied (e.g. FOK/FAK instructions). 

Comparison of Triangulation and Options Implied Processing

The following table compares the behavior of implied processing of Triangulation and Options: