|
PureBytes Links
Trading Reference Links
|
The possibility that U.S. markets could have very volatile, but illiquid
conditions tomorrow as the New Year turns on the other side of the world
while our markets are open made me think about the trading implications.
One implication is that what normally works in a market like the e-mini
S&P may not work as well in tomorrow’s potential environment.
For example, traders who use market orders in the E-mini contracts may
leave themselves open to not getting filled. Or, traders using stops
may leave themselves open to not getting filled. Let me explain how
this most commonly works.
At my clearing firm (ED&F Man International, Inc.), which accounts for
about 40% of the overall TOPS volume, regular E-mini stops are routed to
a special CME Order Manager Stop Server, separate from Globex2. Market
orders are also routed to this server. The server holds the stop orders
and elects them after the price has traded.
Awhile back there was several instances of failure in this system, where
a bad price elected a bunch of stops that should not have been filled.
The CME put some fixes in place to solve this and so far so good. What
they did, according to my sources, is put in a double quote feed into
the stop server. The software examines both prices and if they are
different by a set percentage, then another pair of prices is selected
and analyzed before the stop is deemed elected and sent to Globex2 for
execution.
These stops are not traditional stops in the sense they become true
market orders. These stops become limit orders set several ticks worse
than the stop price. The Clearing Firm sets this differential for the
limit order. In the case of my FCM, the limit distance for the stops is
set at 8 ticks or 2 whole points. Orders are executed on Globex2 on a
first in, first out basis, so the order will match up with the best
available and eligible opposite bid or offer, if possible.
Market orders also sent to the Order Manager Stop Server have the same
limit order dynamics. The market order becomes a bid 2 points above the
last trade or an offer 2 points below the last trade, depending on if it
is a buy or a sell. Ninety-nine-plus percent (my estimate from
experience) of the time these market orders have been filled immediately
in the E-mini S&P. The E-mini S&P is normally that liquid.
However, during times of extreme volatility is when the anomalies
occur. Thus, the environment for tomorrow may be ripe for such misfires
in the E-mini S&P and other Globex2 markets.
The way to overcome these problems, other than not trading, is to use
aggressive limit orders rather than markets and to use specified stop
limits. Aggressive limit orders means that if the E-mini S&P is trading
at 148500, enter an order to buy one at 149000. You will get the best
offer available at 149000 or lower. If you don’t get filled, the order
management of cancel replacing a limit order is much easier and less
complicated than having to check on the status of a market order,
canceling the market order and then entering a new limit order.
Likewise, stop limits on the E-mini S&P are supported by Globex2 itself
and are not sent to the separate stops server. Thus, you can enter your
stop price and define the limit as large as you feel necessary to
increase the probability of ensuring a fill. Again, these orders are
easier to cancel replace than elected, but unfilled, regular stop
orders.
The way that market orders and stops are treated can vary from firm to
firm. Some firms I know have their own special servers for handling
stop orders. If you are not sure how your broker handles these types of
orders, contact your broker. This is not a time to make potentially
costly assumptions.
Regards,
John J. Lothian
Disclosure: Futures trading involves financial risk, lots of it!
Disclosure: John J. Lothian is the President of the Electronic Trading
Division of The Price Futures Group, Inc., an Introducing Broker
clearing ED&F Man International, Inc.
|