I Want to Submit 10,000+ Messages to CME/day, but Not Get Fined.

[lastninja2 10]

Hi,

 

I have devised an automated strategy but it requires that my bids and offers are constantly modified. I guess you could call it some sort of niche market making.

 

In an ideal world, I would probably clock up 100,000 messages to CME during RTH, but 10 or 20,000 would be acceptable. I could live with that.

 

Technology has moved on far enough, I think, that the modern exchanges can handle billions of order modifications in a single session... so any argument that I am clogging up the systems and making conditions more difficult for other traders... I frankly do not buy.

 

However, I am aware that CME doesn't take kindly to this, and that there is every chance of a $1,000/$2,000 fine being handed down via my broker to me, if I attempt it.

 

Is there any way around this? Will a ratio of [10,000 messages : 1 trade] most definitely prompt CME to drop the hammer on me?

 

The markets would benefit if I was permitted to do this - so please somebody - tell me it can be done?

 

Thanks,

AJ

[Tams 20]

Hi,

 

I have devised an automated strategy but it requires that my bids and offers are constantly modified. I guess you could call it some sort of niche market making.

 

In an ideal world, I would probably clock up 100,000 messages to CME during RTH, but 10 or 20,000 would be acceptable. I could live with that.

 

Technology has moved on far enough, I think, that the modern exchanges can handle billions of order modifications in a single session... so any argument that I am clogging up the systems and making conditions more difficult for other traders... I frankly do not buy.

 

However, I am aware that CME doesn't take kindly to this, and that there is every chance of a $1,000/$2,000 fine being handed down via my broker to me, if I attempt it.

 

Is there any way around this? Will a ratio of [10,000 messages : 1 trade] most definitely prompt CME to drop the hammer on me?

 

The markets would benefit if I was permitted to do this - so please somebody - tell me it can be done?

 

Thanks,

AJ

 

if you can make $100,000 a day, what is a $1,000 fine ?

[TheDude 10]

Hi,

 

 

Is there any way around this? Will a ratio of [10,000 messages : 1 trade] most definitely prompt CME to drop the hammer on me?

 

 

 

AJ

 

yes they sure will. What if every trader did that? You may get away with it if you lease a seat or take a market making agreement as a professional liquidity firm, but you'll need your broker/fcm to agree to give you access to their balance sheet (not hard if you have a good track record and low risk strategy).

 

Think of Knight....

 

But hang on - you say you could do 10-20k messages a day - and if that only results in 1 trade a day, somethings wrong. Ive probably misunderstood.

 

Tams makes a good point also.

[lastninja2 10]

Thanks for your replies.

 

I welcome more thoughts - particularly if someone happens to have an inside line on whether the CME really cares.

 

I will eventually put this to the test - but just doing a little bit of due diligence ahead of time, since I don't fancy paying $1/2k fines.

 

Dude. You heard it right. I want to make markets miles away from inside price, and get the occasional fill when some big shot hits in with 1000 contracts.

Yeah it may not be the most glamorous trading idea, but the concept is not without merit.

 

Real shame if I cannot follow through. I am giving serious consideration to operating out of RTH. According to CME documentation, if it's outside of RTH - anything goes! Best prepare for some very peculiar sleeping patterns eh, hehe?

[TheDude 10]

Thanks for your replies.

 

I welcome more thoughts - particularly if someone happens to have an inside line on whether the CME really cares.

 

I will eventually put this to the test - but just doing a little bit of due diligence ahead of time, since I don't fancy paying $1/2k fines.

 

Dude. You heard it right. I want to make markets miles away from inside price, and get the occasional fill when some big shot hits in with 1000 contracts.

Yeah it may not be the most glamorous trading idea, but the concept is not without merit.

 

Real shame if I cannot follow through. I am giving serious consideration to operating out of RTH. According to CME documentation, if it's outside of RTH - anything goes! Best prepare for some very peculiar sleeping patterns eh, hehe?

 

Actually - that sounds like a pretty good strategy - Bluehorseshoe may give some good comments as I think hes into the mean reversion stuff if thats what youre doing - fading the pop caused by the 1000 lot trade - or are you going with it? The only worry is that the algos generally tend to break up their size a lot more these days - and thats only going to continue unfortunately. Look at TY and US where size gets printed a lot more than say ES (if thats what youre looking at)

[lastninja2 10]

Thanks for your feedback.

 

I do like the idea of my strategy, although as you say algos will do their best to break up the orders.

 

The premise is that, occasionally, some big guys/governments/whoever just HAS to punch the market with 1000 contracts. Whatever the reasons... I don't care, I just want to be there to take a little profit when the market unnaturally jumps a dozen prices. (so to answer your Q... yes fade the pop)

 

I am providing a service here, I think... I will be lessening the magnitude of these unnatural spikes by providing liquidity - that is why I am a bit upset that CME have basically scuppered my plans before I could move forward with them. Damn shame.

[lastninja2 10]

Bluehorseshoe : You have the floor, Sir. :thumbs up:

[Predictor 11]

I think you must be joking. Most HFT algorithms POST large size to get a response from other traders while pulling it and never intending to offer that. That's manipulating and CFTC has recently fined a company for as MANIPULATION is illegal.

 

There is no reason to submit 10k messages per day if your limit orders are real.

 

You also can't make markets "miles" away from the price in the liquid futures contracts. They ALWAYS have depth on them. I've put in my order up to 12 hours in advance and seen it trade a boat load of contracts and never fill me.

 

I believe the fine is actually 4k per day. The problem with your strategy isn't that messaging.. well it may be that too. But the other reason that it opens the door for some to post size and pull it which does 2 things: 1 makes large traders execute against non existing liquidity and 2 fakes others into reacting to that. Your strategy may not be manipulative in this way.. sounds it isn't but sounds like also it wouldn't work that well anyway.. If you want to put orders in far off the market, for real, then you can do it. That can for sure work.. I call it "fishing". It doesn't take the ability to shoot in 10k messages per day though.

 

There is a fill ratio you should know about too. If you don't fill 1 order per 20 modifications (I believe) then you can be fined with 4k per day. CME knows that if they allowed the HFT manipulation that occurs in the stocks that everyone would leave or they should should know that.

 

Now, I believe they do make some exceptions to market makers.. you'd have to ask them. Not an expert on this stuff..

Edited December 14, 2012 by Predictor

[lastninja2 10]

Yeah thanks for the feedback, I look forward to some more shared thoughts.

 

BTW for anyone interested, I put together this for my own benefit... shows CME rules:

 

http://s9.postimage.org/q0cc38999/CME_fail.png

 

Predictor, I don't agree with everything you've said. I believe my strategy does requires 10k messages per day, at a minimum.

I don't know what "fishing" is, to be honest. I've heard it alternatively referred to as "baiting". Does it require size to tempt the market towards you? Haha, I don't have the margin to make a dent in any price ladder.

 

Look: my orders are real enough, I just want to sit them away from market all day until some nut case spikes the market in to my order. With a couple of lots I'm not going to help much, by way of liquidity, but give me time and I'll build it up to 20 lots... maybe help that nut case get his order filled without spiking the markets QUITE so far.

[SIUYA 11]

so basically if the market is 100 bid and 101 offered you have orders at 99 and 102 hoping for someone to send in a market order.

But if the market naturally goes 99 bid and 100 offered or 101 bid 102 offered you pull out and resend?

 

You are live - you are not waiting for an order to suddenly plough through the bid or offer.?

[lastninja2 10]

Presume that was a question to me rather than an explanation of fishing?

 

Actually, bid 99, offer 100

 

I want my bid at 89, offer at 110 (for example)

Or even more extreme than that.

 

If market shifts to bid 100, offer 101.... my bid shifts up 1 and my offer shifts up 1.

 

Sooner or later some big shot is going to hit market with enough contracts to spike price in to my orders - BEFORE my software has a chance to re-position my orders

[SIUYA 11]

regardless of the rules - you are basically saying you want to be deliberately slower - or at least slow enough for a big spike.

 

I think it makes sense expect that every now and again you will get caught in a big move that just keeps going.

 

Maybe an alternative for less orders being sent by yourself is to give yourself a band of adjustments....

eg; bid 99-offer 100 you sit on the bid at 89, offer 110 until the market moves out of the range

96 to 104

OR

sit at certain predetermined levels.

(a friend of mine who is a deep deep value investor sits on some bids and offers way out of the market just waiting.

(I dont know enough CME rules to worry about too many orders)

[lastninja2 10]

thanks for your reply + suggestion.

 

The band idea is interesting, although I could imagine an issue when the price is fluctuating around the boundary, forcing my software to modify orders constantly.

 

Probably the most straightforward method, and one which I can employ currently, is to just reduce the time frequency of updates to modify every 10 seconds, or what have you.

 

You explained my intended strategy very well... and yes, the really big moves are what can make or break it.

[Predictor 11]

lastninja: you understand that they'll have to trade through your level for you to get filled.... just an fyi

[BlueHorseshoe 10]

lastninja: you understand that they'll have to trade through your level for you to get filled.... just an fyi

 

That's not at all true, Predictor.

 

BlueHorsehose

[BlueHorseshoe 10]

BEFORE my software has a chance to re-position my orders

 

Hi AJ,

 

This sounds interesting - so in a world where the HFT firms scramble for nanoseconds of improvement in execution, your algorithmic edge depends on the inherent latency of your platform? That's sufficiently far through the looking glass that it might actually work.

 

I have absolutely no hands-on experience of any of this stuff, so my thoughts are purely theoretical . . .

 

1. As has already been mentioned by The Dude, many large institutional orders will be algorithmically executed as iceberg orders. It is supposedly possible to reconstruct icebergs using quant models, but I have no idea how. An iceberg nowadays does not mean executing a 1000 lot as two 500 hundred lots. It means executing a 1000 lot as a random number of randomly sized blocks executed at random time intervals and with random cancellations. Unless you're the sort of person who thinks String Theory is a bit simple, you'll have your work cut out modelling that. I've also heard it said that when a 1000 lot type order hits in an obvious way, this is usually the tail end of such a buy/sell program - they've already filled 95% of their order, so they're not too worried about showing their hand with the last 1000 contracts. I have no idea how true that is. Given that you’re fading such orders, if they’re the tail end of a program then that’s probably a good thing.
    
   
2. As Predictor points out, the CME execution to cancellation ratio is 1:20. There are two obvious ways to operate within that constraint. Firstly, don't perpetually 'float' orders at a specified distance from the market; just seed the entire order book above and below the bands. That way, when your algorithm calls for a 100 bid to be pulled and a new bid submitted at 99, you'll just need to pull the 100 bid as the 99 bid will already be sitting there. Secondly, play the game the way the CME want you to; devise a method for order placement that can pretty much breakeven (disregarding your primary strategy trades), and then allow 1 order in 40 to fill in the knowledge that these will net out to breakeven whilst keeping you compliant. It's 1 in 40 rather than 1 in 20 because you know that you'll need another filled order to exit that position. And remember that you don't strictly need to fill every 21st order, you just need to fill 5% of your posted orders by the end of the day. This means that you can be a little picky about how these are distributed through time, based on your expectation of a breakeven get-out. So, simplistically, you’ve cancelled 20 sell orders and you need the 21st to fill, so you leave it in place, it gets filled, and you immediately post bids a single tick above and below. That’s pretty much a coin toss for a 1-tick loss or a 1-tick profit, and could net out over a large enough sample size (although you’ve got your commission costs to factor in, so you’ll find you need to be a bit cleverer than that!).
    
   
3. Another thing that may be useful to you, referring again to a point that Predictor makes, is a basic ability to estimate your position in the queue. This is another very difficult quantitative hurdle. I ran a thread on this subject here: http://www.traderslaboratory.com/forums/day-trading-scalping/13811-daytraders-do-you-know-your-enemy.html, although my posts are rather diluted by other’s contributions. I posted a model for a 'worst-case PIQ estimation'. I eventually ran into limitations in the data that I had available, and was unable to continue to pursue my ideas for modelling PIQ, but if you want to go down this avenue I will update that thread with my suggestions. Having an estimation of your PIQ would enable you to make an informed decision about the likelihood of getting filled with a limit order. Your algorithm will then be able to monitor decay in the rate at which the inside prices are being matched with market orders relative to your anticipated PIQ on either side of the book; when market interest wanes and you’re too far from the front of the queue then it may make sense to fire in a market order and guarantee a fill.
   

 

I hope some of that is helpful, and let me know if I haven’t explained anything clearly.

 

Regards,

 

BlueHorseshoe

Edited December 14, 2012 by BlueHorseshoe

[BlueHorseshoe 10]

I could imagine an issue when the price is fluctuating around the boundary, forcing my software to modify orders constantly.

 

That's easily solved by using the principle of 'hysteresis'. Think of your thermostat. If you set it to 15, it doesn't switch the heating on every time the temperature falls below fifteen and off every time it rises above fifteen. Instead, it places a 'tolerance' band around your desired temperature. It may switch on at 13 and switch off at 17, for example. This reduces the number of on/off signals and minimizes wear and tear on components.

 

In your scenario above, of course, you'll need boundaries around your boundaries!

 

BlueHorseshoe

[lastninja2 10]

"I've also heard it said that when a 1000 lot type order hits in an obvious way, this is usually the tail end of such a buy/sell program - they've already filled 95% of their order, so they're not too worried about showing their hand with the last 1000 contracts. I have no idea how true that is. Given that you’re fading such orders, if they’re the tail end of a program then that’s probably a good thing."

 

- Very interesting... it certainly sounds plausible.

 

"just seed the entire order book above and below the bands. That way, when your algorithm calls for a 100 bid to be pulled and a new bid submitted at 99, you'll just need to pull the 100 bid as the 99 bid will already be sitting there."

 

- I really like the idea, if I understand this correctly, but in practice I cannot see it working for me.

I do not have, nor will I ever have, sufficient margin to seed the orderbook with limit orders in this manner. Assuming I somehow were able to litter the price ladder with bids and offers, in the rare (but eventually inevitable) instance that a very large sudden move occurs, a whole page-worth of limits would be simultaneously filled, leaving me with a catastrophic loss.

Furthermore, when do I seed the orderbook? At the beginning of the RTH? Do I pull everything when German ZEW data is due out? Do I the re-seed the entire orderbook? CME's volume to message ratio is done on the basis of (New order = 0, Modification = 1, Cancellation = 3)... this approach would certainly cut down my total messages from 10,000... but it looks to me like it would still be a very large number by the end of the day.

 

"Secondly, play the game the way the CME want you to; devise a method for order placement that can pretty much breakeven (disregarding your primary strategy trades), and then allow 1 order in 40 to fill in the knowledge that these will net out to breakeven whilst keeping you compliant. (although you’ve got your commission costs to factor in, so you’ll find you need to be a bit cleverer than that!)."

 

- Again I really do like your thinking, although I am still waiting for a flash of inspiration that can allow me to overcome my ridiculously high commission costs with a strategy that fills 5% of the time.

 

"I hope some of that is helpful, and let me know if I haven’t explained anything clearly."

 

Yes, very interesting thoughts that would not have occurred to me, thanks for taking the time to write such a lengthy post - I sensed something big was coming after your initial shot-across-the-bow to Predictor

[BlueHorseshoe 10]

in the rare (but eventually inevitable) instance that a very large sudden move occurs, a whole page-worth of limits would be simultaneously filled, leaving me with a catastrophic loss.

 

If the basic premise of your strategy is correct, then surely getting orders filled under such circumstances is the whole point? You'll just end up with a couple of dozen positions that mean revert rather than one. Or have I misunderstood?

 

Furthermore, when do I seed the orderbook?

 

I don't know, it's not something I've ever done (I don't have the capital )Given available capital, then as far out as you can? I imagine if you place a buy order in the ES down at 1239 today, then by the time price gets there (if price ever sees that level again) you'll probably be pretty near the front of the queue.

 

Do I pull everything when German ZEW data is due out?

 

I don't know - do you have any interest in German ZEW data? Does it have any relevance to your strategy? I would assume that if a big buyer/seller wants to come in off the back of such a data release then making a market for them is exactly what you want to be doing, not what you want to be avoiding?

 

Maybe I'm confused by your goals . . .

 

- Again I really do like your thinking, although I am still waiting for a flash of inspiration that can allow me to overcome my ridiculously high commission costs with a strategy that fills 5% of the time.

 

Remember though, within reason you can control which orders you allow to be filled. Suppose your commission is $4 per round trip, which should be possible with enough volume (and you'll be generating plenty if you can get to breakeven on your 'compliance trades') and exchange membership through a leased seat. That means every 3 roundtrips cost you $12. So, if you can take your expected single-tick win-rate from 50% (coin toss) to 66%, you'll be $12.5 + $12.5 - $12.5 = $12.5 trading profit before a deduction of $12 commission takes you back to breakeven.

 

Ultimately, whichever way you want to slice it, what you're wanting to do is a "big" idea, so you'll need to think big, not think like a retail trader. Things like exchange membership shouldn't be an issue.

 

Yes, very interesting thoughts that would not have occurred to me, thanks for taking the time to write such a lengthy post - I sensed something big was coming after your initial shot-across-the-bow to Predictor

 

The point Predictor was trying to make is actually reasonably valid - most people don't realise the impact that unfilled limit orders will have on their strategy. I'm assuming that you do. For general backtesting purposes it is best to grant that limit orders would only have filled if price traded through that level. When we're talking about single-tick market making though, the differences become too significant to ignore, and you either need an intelligent way to estimate this or enough realtime trading ruselts to know the outcome. Predictor gave you a glimpse of the latter when he mentioned a limit order placed twelve hours in advance that didn't fill. Predictor probably has many years of real time experience to draw these conclusions from. I'd prefer something a little less anecdotal before I put any money at stake, however.

 

Given all of the above, I think you need to do a bit more research. You know that the further out from the market your order is placed the less chance there is that you will need to adjust it to avoid being filled by casual trading. And you know that the larger an elephant order the more price tiers it will likely take out in one hit, so the further you are from the market (up to a point) the more chance you have of getting filled only by a larger elephant, while the closer to the market the more chance you have of being filled by a smaller elephant. And you should know (I don't) the probabilities of a profitable outcome from different sizes of elephant order.

 

Combining all three pieces of information, is there a sweet spot somewhere in there that will allow you to profit by market-making for elephants without too many cancelations to attract fines, and too few cancellations to get filled by casual trading too often?

 

BlueHorseshoe

Edited December 14, 2012 by BlueHorseshoe

[BlueHorseshoe 10]

Scott Hunsader of NANEX, quoted from an alphaville article:

 

 

As an HFT there is a distinct advantage to cause volatility. When the market is anticipating the release of a news event, the depth of orders in the eMini futures order book drops to about 1/3 it’s previous levels over a period of 5-30 seconds.

 

We typically see the emini depth go from 20,000 on each side (20,000 spread out over 10 buy levels, and about the same on the 10 sell levels) to between 5,000 and 10,000.

 

At lower depth levels, it becomes much easier for someone to move the eMini price suddenly — at the reduced level you only need to buy or sell about 1,000 contracts to run through 3 to 4 levels of the book immediately.

 

That causes an explosion of quotes and trades on the related ETFs, equities and options — the level of data nearly always causes saturation and delays — from cqs to direct feeds.

 

Which means, insufficient market depth presents great opportunities for algo traders especially when it coincides with a known high activity trading period to come.

 

Perhaps it also explains why initial reactions to data releases sometimes make so little fundamental sense nowadays and why they are often reversed a matter of minutes later?

 

Though sometimes it doesn’t even take a data-release. Any low depth scenario will do. As Scott Hunsader observes:

 

The instantaneous selling of emini futures and accompanying explosion of quotes that you see at 9:54:58 is becoming more common and occurs throughout the trading day. Yesterday there were 9 such events. Typically 1500 to 3000 contracts are involved in each event. Once (April 8, 2011 at 14:56:28.800) we saw about 22,100 contracts dumped on the market within 2 seconds! So much for the W&R algo selling too much!

 

BlueHorseshoe

[lastninja2 10]

Thanks, interesting read again.

 

Blue - the reason I cited German ZEW data (purely as an example, I could have chosen NFP, whatever), was because I don't like the idea of standing infront of the market when it spikes in such cases.

Why?

Well because I worry that there may be a good fundamental reason why prices should shift upwards by 30 ticks, and STAY up there...

 

Whereas if there is no news released, market just bumbling along on low volume and suddenly it dives 20 prices because some guy sold 1000 contracts, well, I feel more confident that the price will spring at least some way back to where it began. Make any sense?

 

But I might well be looking at it in the wrong way.

 

I'm just trying to do the best I can on a shoe-string budget. I'd love to be able to place bids and offers all over the show, a couple of dozen offers filled? No problem, I have the $70,000 initial margin requirements right here, sir. :o

[BlueHorseshoe 10]

Thanks, interesting read again.

 

Blue - the reason I cited German ZEW data (purely as an example, I could have chosen NFP, whatever), was because I don't like the idea of standing infront of the market when it spikes in such cases.

Why?

Well because I worry that there may be a good fundamental reason why prices should shift upwards by 30 ticks, and STAY up there...

 

Whereas if there is no news released, market just bumbling along on low volume and suddenly it dives 20 prices because some guy sold 1000 contracts, well, I feel more confident that the price will spring at least some way back to where it began. Make any sense?

 

But I might well be looking at it in the wrong way.

 

That makes sense, although if you look at the origins of Stat Arb and other mean reversion strategies, they generally didn't give a damn what caused the price movement. Having said which, they were also delta-neutral and heavily capitalised . . .

 

But what you're effectively saying is that one event is 'some guy' who sold 1000 contracts, whereas the other event is the result of an informed participant. If this is the case, then maybe you could look at ways to distinguish the two (MightyMouse might have some suggestions on this?) - certain types of market participants traditionally are supposed to react at different levels. On the other hand, if you believe Hunsader, 99.9% of all posted quotes are by the HFTs, who might count as 'informed', but certainly don't care about anything that happens outside of the next couple of seconds, and won't therefore be moving markets with the longer term outlook that you're fearing.

 

I think that what you're trying to do may be harder to implement than you think, but not impossible.

 

I'm just trying to do the best I can on a shoe-string budget. I'd love to be able to place bids and offers all over the show, a couple of dozen offers filled? No problem, I have the $70,000 initial margin requirements right here, sir.

 

Yep, I'm in the same boat, so I can empathise

 

Have a good weekend!

 

BlueHorseshoe