GLOBEX Advisory Notices
To |
From | CME Globex Account Management
Subject | Reminder and Clarification - Allocation Algorithm for CME Eurodollar Futures
Notice Date | 2005-01-28
Notice Number | 012805-2
Effective Date |
Dear CME® Globex® Customers, As previously announced, CME will implement an enhancement to the Pro Rata Allocation Algorithm in CME Eurodollar futures contracts entered on the CME Globex electronic platform. This change will be implemented over the next two weekends, January 30, 2005 and February 7, 2005. The enhancements will introduce an element of First-In, First-Out (FIFO) matching to the current Pro Rata algorithm. This hybrid matching algorithm will provide greater opportunity for traders who enter the market early at a given price, while significantly increasing the system's efficiency by reducing the number of fill messages. The changes to the algorithm are as follows: Treatment of Fractional Fills Changed (to be implemented January 30). If the allocation results in a fractional fill, CME Globex will continue to round down the fractional contract and it will be combined with all other fractional fills for allocation during a second "pass" through the order book. Today, the remaining contracts resulting from fractional fills are allocated to the largest order in the book at that price level. Beginning on January 30, the remaining contracts resulting from fractional fills will be allocated according to FIFO rules. Allocation of 1 Lot Fills Changed (to be implemented February 7). CME Globex will no longer allocate 1 lot fills during the first allocation. Rather, any orders that would result in a 1 lot fill will not be filled during the first pass through and these 1 lot fills will be added to the fractional fills to be allocated FIFO. TOP Order Priority Remains the Same. Any order that improves the best bid or offer in the book will continue to be filled in its entirety before other orders are filled. Pro Rata Allocation of Trades after Filling the TOP Order Remains the Same. Consider the following example: Assume orders 1 through 5 were entered in the following time sequence according to order number and represent the best bid in the order book Assume an incoming offer to sell 60 lots at 97.04 is entered The following chart illustrates the CME Globex allocation under the enhancements to matching algorithm: Incoming order to sell 60 at 97.04
Order Number | Order Size | Price | 1st Allocation | 2nd Allocation | 1st Allocation Calculation
Order 1 - TOP Order | 10 | 97.04 | 10 | — | TOP Order
Order 2 | 5 | 97.04 | — | 3 | (5/150) * 50 = 1.66667
Order 3 | 20 | 97.04 | 6 | — | (20/150) * 50 = 6.66667
Order 4 | 50 | 97.04 | 16 | — | (50/150) * 50 = 16.66667
Order 5 | 75 | 97.04 | 25 | — | (75/150) * 50 = 25
Order 1 will be allocated 10 lots based on its TOP order status. Orders 2 - 5 will be allocated fills according to the percentage they comprise of the remaining 150 contracts on the bid multiplied by the 50 lots remaining of the incoming offer. All fractional fills will be rounded down. As you can see in the gray shaded column on the right, Order 2 would have resulted in a 1 lot fill (1.666 would be rounded down to 1 lot) and as a result is allocated zero contracts on the first pass according to the new matching rules. The first pass through the order book results in the allocations illustrated above with 3 lots left to be allocated due to rounding and the omission of the 1 lot fill. CURRENTLY, the remaining 3 contracts would be allocated to the largest order remaining in the book, Order 5. However, with the implementation of the new algorithm, as of January 30, the remaining 3 lots will be allocated according to FIFO rules which will result in Order 2 receiving the 3 lot fill. As you can see, the new matching rules are beneficial to the relatively smaller Order 2 which was quicker to the price than Orders 3-5. If you have any further questions, please contact Craig Bewick in Interest Rate Products at 312.648.3839, or please contact your CME Globex Account Manager at 312.634.8700 in North America, or 011.44.207.623.2550 in Europe. Thank you, CME CME Globex Account Management 312.634.8700 011.44.207.623.2550