Globex Advisory Notice
From | John M. Restivo, Director GLOBEX2 Control Center
Subject | System Update #93 Proposed Change to the Currency Futures Calendar Spread Trade Matching Algorithm for GLOBEX2.
Effective Date | 11/23/01
Notice Number | SU#0193
S-3739 November 23, 2001 PROPOSED CHANGE TO THE CURRENCY FUTURES CALENDAR SPREAD TRADE MATCHING ALGORITHM FOR GLOBEX�2 Pending requisite Exchange approvals and subject to the CFTC exchange certification procedure, CME will implement changes to the currency futures calendar spread trade-matching algorithm for GLOBEX� 2 trades effective Sunday, December 2, 2001. Market users support or otherwise do not object to changing the first in first out (FIFO) algorithm for currency futures calendar spreads on GLOBEX 2. The proposal prevents a market user from entering a large spread order into the GLOBEX 2 system at a competitive price and essentially "locking out" other market participants from transactions at that price until their large order is satisfied. Please note that the large orders "locking out" smaller orders most likely would be placed by market-making firms and would not be customer orders. CME market research indicates that market-making firms are willing to share allocation of trades with other market participants. CME has weighed the needs of all market participants and believes that it is best for the development of our electronic currency futures markets to adopt this matching algorithm change for currency futures calendar spreads. Proposal for Currency Calendar Spreads Only - Allocate transaction amounts for any bid or offer hit to a proportional amount of all bids or offers at that price. (Differs from current Eurodollar futures allocation algorithm, where first in best bid or offer is satisfied first, then all others at a proportion to amounts at that price.) Example � Suppose the best bid of a December/March calendar spread was 14 and a total of 1,210 contracts were bid at that price by four different orders as follows: 1,000 contracts by Order 1; 100 contracts by Order 2; 100 contracts by Order 3; and 10 contracts by Order 4, then when a trader hits the 14 bid by selling 500 contracts, the GLOBEX 2 system would allocate 414 contracts (1,000/1,210 * 500 plus 1 remainder) to Order 1; 41 contracts each (100/1,210 * 500) to Orders 2 and 3; and 4 contracts (10/1,210 * 500) to Order 4. Under the current FIFO method or ED futures allocation algorithm, the 500 contracts would go to Order 1. Proper Competitive Market Incentives Retained - Incentive remains to put in large size orders at competitive prices, but small traders are not "locked out" of the calendar spread rollover business on GLOBEX 2. Implementation � Pending requisite approvals, implementation will be on Sunday, December 2, 2001, in time for the December/March currency futures rollover. Interpretation to Rule 580 - As with the Allocation Algorithm for Eurodollar futures, CME will adopt an interpretation to Rule 580 for the currency futures calendar spread algorithm for GLOBEX 2. The text of Rule 580 and the proposed amended Interpretation of Rule 580 follows with additions underlined and deletions lined out and in brackets. MATCHING ALGORITHM FOR GLOBEX TRADES Unless otherwise specified by the Exchange, orders entered into the GLOBEX System will be matched in accordance with an algorithm that gives first priority to orders at the best price and that gives priority among orders entered at the same price based on their time of entry into the system, with the first order entered receiving first priority, the second order entered receiving second priority, etc. The Exchange may use a different matching algorithm for particular contracts by giving written notice of such algorithm to members and firms using GLOBEX at least ten days before use of such algorithm is implemented. See Interpretation of Rule 580-MATCHING ALGORITHM FOR GLOBEX TRADES at the end of Chapter 5. INTERPRETATION OF RULE 580--MATCHING ALGORITHM FOR GLOBEX TRADES (Effective September 1998; Amended December 2001) Eurodollar Futures The Exchange has determined to use an Allocation Algorithm to match orders in Eurodollar futures contracts entered in the GLOBEX Electronic Trading System. Unless specifically referenced in this Interpretation, [A]all other futures and options contracts, including Eurodollar options, will continue to use the normal matching algorithm based on price and time priority. Eurodollar futures contracts were chosen to use the Allocation Algorithm because they usually trade in a narrow price range, and each price level is represented by size. The Allocation Algorithm operates as follows: After the opening, Time Priority is assigned to the first order at a price that betters the market when the order is received. Only one buy order and one sell order can have Time Priority at any given time. Orders with Time Priority are matched first regardless of size. An order will lose Time Priority when an order at a better price is entered. Example: An order to buy 50 contracts is entered at 105. This order is the first order in at this price level. Another order comes in and betters the market, buy 25 contracts at 106. The order at the 106 level has Time Priority now. The market sells off and the bid [of] for 25 contracts at 106 is hit. The bid [of] for 50 contracts at 105 does not regain its Time Priority and will be allocated according to size along with all the other 105 bids. After the Time Priority order is filled, the Allocation Algorithm is applied to the remainder of the resting orders at that price level. The Algorithm will attempt to match the same proportion of each such order. Example: There are orders to buy 10 and 20 contracts at the same price, and neither order has Time Priority. A sell order for 15 contracts at that price is entered. The Algorithm will match the sell order against the buy orders so that 50% of each buy order is matched. If the "Initial Allocation" results in a fraction, the Algorithm will "Round Down" or drop the fractional amount. Any contracts still to be allocated after the "Initial Allocation" has run are added to the largest order. If two or more orders have identical quantities and are the largest orders, the Algorithm will perform an "Electronic Coin Flip" and assign the remainder to the order that wins. Use of the Allocation Algorithm for Eurodollar futures will start upon the launch of the GLOBEX 2 System. Currency Futures Calendar Spreads (Intra-currency Futures Spreads) The Exchange has determined to use an Allocation Algorithm to match orders in currency futures calendar spreads (intra-currency futures spreads) entered in the GLOBEX Electronic Trading System based on best Price Priority. Except for Eurodollar futures as described above, all other futures and options contracts, including currency options, will continue to use the normal matching algorithm based on price and time priority. Currency futures calendar spread contracts were chosen to use an Allocation Algorithm because they, like Eurodollar futures contracts, usually trade in a narrow price range, and price levels are represented by size, particularly during the rollover period. The Allocation Algorithm operates as follows: After the opening, Price Priority is assigned to all orders at the price that betters the market when orders are received. All buy orders and all sell orders at the best price have Price Priority at any given time. Orders with Price Priority at the best price are matched according to an Allocation Algorithm in proportion to all orders bid or offered at that best price as follows. Example: Suppose the best bid of a December/March calendar spread is 14 and a total of 1,210 contracts are bid at that price by four different orders as follows: 1,000 contracts by Order 1; 100 contracts by Order 2; 100 contracts by Order 3; and 10 contracts by Order 4, then when a sell order hits the 14 bid by selling 500 contracts, the GLOBEX2 system will allocate 414 contracts (1,000/1,210 * 500 plus 1 remainder) to Order 1; 41 contracts each (100/1,210 * 500) to Orders 2 and 3; and 4 contracts (10/1,210 * 500) to Order 4. All orders at the best price will lose Price Priority when an order (or orders) at a better price is (are) entered. Example: An order to buy 50 contracts is entered at 12. This order is the first order in at this price level. Another order comes in and betters the market, buy 25 contracts at 13. The buy order at the 13 level has Price Priority now. The market sells off and the bid for 25 contracts at 13 is hit. The bid for 50 contracts at 12 regains its Price Priority because it is now the best price and this order will be allocated according to size along with all the other 12 bids. If the "Initial Allocation" results in a fraction, the Algorithm will "Round Down" or drop the fractional amount. Any contracts still to be allocated after the "Initial Allocation" has run are added to the largest order. If two or more orders have identical quantities and are the largest orders, the Algorithm will perform an "Electronic Coin Flip" and assign the remainder to the order that wins. Pending requisite approvals, use of the Allocation Algorithm for currency futures calendar spreads will start with the Sunday, December 2, 2001 GLOBEX2 trading session for the Monday, December 3, 2001, trade date. If you have any questions, please contact Mr. Scott Brusso, Director, Currency Products, at (312) 930-3133, or Mr. Steven Youngren, Associate Director, Financial Product Development, at (312) 930-4583. 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