Frequently Asked Questions – Relationship-Based Trading

What changes are coming to CME Group Agricultural markets?

There are two types of relationship-based trading transactions: blocks and crosses on CME Globex. Both types of transactions are highly regulated and monitored by the exchange. For specific details around the change, refer to the SER announcement.

What is meant by Relationship-Based Trading?

Relationship-based trading allows bilateral conversations to take place before a transaction occurs. This type of transaction has been present in the Ags markets in the form of Exchange for Related Positions (EFRPs) and has helped participants manage risk in an effective manner.  

The central limit order book (CLOB) provides robust liquidity facilitating the majority of transactions without the need for relationship-based trading. In some instances, such as executing orders of significant size or transacting in less liquid products, relationship-based trading will help facilitate the transaction.

Why is CME Group allowing Relationship Based Trading in Agricultural markets?

Blocks and crosses are used across all other asset classes at CME Group and have shown benefit to the marketplace as a whole. This move will harmonize execution methods across the exchange, reducing complexity and increasing the breadth of participants. The decision to trade using relationship-based trading is driven by an assessment of marketplace liquidity relative to the size of your order to help foster the best execution possible.

What specific issues will blocks and crosses address?

Futures and options are standardized contracts, with clearly-defined specifications, that are transacted in a robust Central Limit Order Book (CLOB) where diverse market participants can buy and sell.  However, there are times when the central limit order book may not meet all the needs of the marketplace.

For example, a longer-dated futures contract that is not actively traded by other participants. In this scenario, communicating the desire to trade the contract prior to executing the order may result in finding liquidity that is not currently present in the order book.

How will Relationship Based Trading affect the central limit order book (CLOB) from a volume and liquidity standpoint?

Looking across asset classes, block and cross markets work in tandem with the central limit order book to create a diversified, liquid market. Block transactions account for a small percentage of volume when compared to active central limit order book markets.

The exchange will promote CME Globex as the most transparent venue where values may readily be referenced. Liquidity is a prerequisite for the efficient discovery of equilibrium prices.  Thus, it is not our intention to divert any significant volume of trade from the mainstream competitive marketplace. 

Why would someone use a block or cross transaction on CME Globex?

When screen liquidity is not evident, bi-lateral conversations allow participants to talk through price, direction and size which may lead to a better hedge or trade.  Looking at cross and block orders in other markets, participants use blocks or crosses for two scenarios.  When the instrument type is unique such as a crush option or a far dated, out of the money strike or when the order is large relative the typical order size for that instrument.

For whom are these trade types intended?

Crosses on Globex- Any participant that has access to CME Globex markets can enter a cross on Globex.  A cross involves pre-execution communication to come to terms on trade details.

Blocks- A block is designed for institutional customers who qualify as an Eligible Contract Participant (ECP).  Block trades must also meet specific volume threshold and reporting requirements that can be found here.

See Block Trades

How does the market know when an R-Cross or block is executed?

When executed, an R-Cross message is instantly seen across CME Globex

A block transaction must be reported to the exchange within a specified time period as defined in the rulebook. Once a block transaction is reported, it is disseminated to the entire marketplace through the CME Group website, CME Direct or any other vendor who chooses to disseminate the information.

How do these trades impact open interest and volume?

Blocks and cross volumes are accounted for when looking at end of day open interest and volume figures.  Block and cross volume can also be found separately when looking at end of day statistical reports

How are blocks and crosses regulated?

The Market Regulation Department conducts trade surveillance of cross-trades on CME Globex and block trades to ensure that the transactions comply with the rules of the Exchanges.  Failure to comply with the applicable rules may result in disciplinary action. 

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