Pre-Execution Communications - Overview and Requirements

Pre-execution communications are defined as communications between market participants for the purpose of discerning interest in the execution of a transaction prior to the exposure of the order to the market. Any communication that involves discussion of the size, side of market or price of an order, or a potentially forthcoming order, constitutes a pre-execution communication.

CME Rule 539.C. allows parties to engage in pre-execution communications with regard to transactions executed on the CME Globex platform where one party wishes to be assured that a contra party will take the opposite side of the order provided they follow the appropriate guidance protocols for execution.

Pre-execution communications are prohibited in connection with pit transactions executed on the trading floor, with the sole exception of CME options on S&P futures transactions executed in accordance with CME Rule 549 (Large Order Execution Transactions – (LOX Orders)).

Pre-execution communications are permitted in all CME, CBOT, NYMEX and COMEX futures and options products, and CBOT invoice swap spreads traded on CME Globex.

After engaging in pre-execution communications, when the parties agree to a price and quantity of their transaction to be executed on CME Globex, they will need to follow the appropriate protocol for that particular product.

Read the permissible protocol(s) for a particular product.

In many instances, more than one cross protocol may be available for a particular group of products.

The use of an ineligible cross protocol for a particular product or group of products constitutes a violation of Rule 539.C.

There are four types of crossing protocols.

The first crossing protocol is an Request for Quote (RFQ) + Request for Cross (RFC) Cross, or R-Cross. Subsequent to the pre-execution communications, an RFQ for the particular option or spread or combination involving an option must be entered into CME Globex. Thereafter, the RFC order must be entered no less than 15 seconds and no more than 30 seconds after the entry of the RFQ in order to proceed with the trade.

In CME and CBOT agricultural futures and options, the RFC order must be entered no less than five seconds and no more than 30 seconds after the entry of the RFQ in order to proceed with the trade. The RFQ and the RFC order must be entered within the same trading session.

Failure to enter the RFC order within 30 seconds after the entry of the RFQ will require a new RFQ to be entered prior to the entry of the RFC order, which must be entered in accordance with the time parameters just described in order to proceed with the trade. Neither the price nor the quantity of the orders on the RFC is displayed to the marketplace. Additionally, there is no information on the participant-entered RFQ which identifies that an RFC is forthcoming. A participant-entered RFQ in connection with an R-Cross is indistinguishable from a generic RFQ sent to CME Globex.

When using the R-Cross protocol, all orders will interact with the orderbook prior to crossing if the price of the cross is at or worse than what is showing in the market at the time.

Numerous Independent Software Vendors (ISVs) support the R-Cross. For market participants using CME Direct, functionality built into the application will prevent the entry of the RFC outside of the prescribed time requirements. This functionality is intended to facilitate compliance with the relevant entry time requirements.

In a Globex Cross, or G-Cross, the order of the party that initiated the pre-execution communications must be entered into CME Globex first. The second party’s order may not be entered into CME Globex until a period of five seconds has elapsed from the time of entry of the first order. No RFQ is required in a G-Cross.

When using the G-Cross protocol, if the price of the cross is at, or worse than, what is showing in the market at the time all orders will interact with the orderbook prior to crossing.

In an Agency Cross, or A-Cross, a Cross Sequence (CS) is used to enter the buy and the sell orders into CME Globex.

Following the pre-execution communications, an RFQ for the particular futures, options, swap, spread or combination must be entered into CME Globex. Thereafter, a CS, which is defined as the entry of a day-limit order followed immediately by the entry of a day-fill-and-kill order, must be entered into CME Globex.

A-Cross functionality is currently supported solely on CME Direct.

Get more information about registering for CME Direct.

While A-Cross functionality on CME Direct allows the party to populate the opposing buy and sell orders in a single ticket, those orders will result in two discrete CME Globex order entries, which will be handled to the particular algorithm applicable to the product. The broker must select the non-initiating party as the ‘Aggressor’ on the order ticket, which results in the CS being populated with the initiating party’s order as a day limit order and the non-initiating party’s order as a day fill-and-kill order. Failure to enter the buy and sell orders within 30 seconds after the entry of the RFQ will require the entry of a new RFQ and CS in order to proceed with the trade.

The final protocol is called the Committed Cross, or C-Cross. In a C-Cross, subsequent to the pre-execution communication, a RFC order, which contains both the buy and the sell orders, must be entered into CME Globex. Upon entry of the RFC, CME Globex will display an indication that a cross has been committed to the market and will occur in five  seconds. The matching algorithm for the C-Cross will depend on whether the group of products is eligible for a better price match (BPM).

See the Table for information on products eligible for a BPM allocation and the specific match percentage applicable to those products.

C-Cross is currently available in all CME FX options and in all CME and CBOT Interest Rate and Equity Index options. C-Cross functionality is supported on CME Direct, and may be supported by other ISVs.

Get more information on the crossing protocols.

This is a lesson on pre-execution communications. For official regulatory guidance on pre-execution communications, reference the applicable Market Regulation Advisory Notice.