This topic explains the steps involved in Futures implied order matching priority rules when two or more implied sources can create match event at a given price.

Contents

Futures Implied Source Priority Rules

Implied source represents all the orders that must be resting on the book for an implied trade to be possible. All potential implied sources are sorted in ascending priority order according to the CME Globex matching algorithm. The order of entries at a given price level defines the order in which trades will occur for all implied sources.

The sorting involves comparing two implied sources at a time in various combinations until the list of implied sources is sorted from best to worst.

• Each two implied sources comparison may look at up to all criteria listed below in the order they are evaluated. 

• If both implied sources compare equally at a level, then the comparison proceeds to the next level until a tie-breaker is found.

The Futures priority of implied sources, at a given price, is as follows:

Generation 

Outrights (generation 0) always trades first, then followed by spreads (1st generation).

Strategy Type Priority

Lowest spread type priority trades first. The spread type priority is determined by the Priority value listed in the Futures Implied Priority List.

Example: Spread Type Priority

Given

Current Market:

CLX4

CLX4-CLZ4

BZZ4

CLZ4-BZZ4

Implied Bid in the CLZ4

• Implied source 1 - CLX4-CLZ4 and CLX4

  • CLZ4 Buy Implied price (9026-6)=9020

• Implied source 2 - CLZ4-BZZ4 and BZZ4

  • CLZ4 Buy Implied price (9012+8)=9020

When 

• CLZ4 Sell Aggressor arrives for 1@9020 

• Strategy type priority:

Then

CME Globex creates one trade,

• CLZ4 aggressor trades with CZ4 Implied order from source 1.

• This is determined by the CLX4-CLZ4 spread type (SP), which has the lowest strategy type priority.

Implied Inter Commodity Spread Priority

Lowest Implied Inter Commodity Spread (ICS) product code priority trades first. This is determined by the value in the field Priority in the table Implied ICS Priority List.

Example: Implied ICS Product Priority

Given

• Spread Ratio = 1:1

• Settlement for TWEU4 = 107'000

• Settlement for ZNU4 = 120'998

• Settlement for ZFU4 = 120

Current Market:

TWEU4 (20 Year U.S. Treasury Future)

ZNU4 (10 Year U.S. Treasure Future)

FTW 01-01 U4 (5 Year U.S. Treasure Future (ZF) v 20 Year U.S. Treasure Future (TWE))

FYN 01-01 U4 (5 Year U.S. Treasure Future (ZF) v 10 Year U.S. Treasure Future (ZN))

Implied Offer in the ZNU4

Implied Leg1 Price (ZNU4) = (Spread Price)+ (Leg 2 price-Leg 2 Settle)+Leg1 Settle

• Implied source 1 - FTW 01-01 U4 and TWEU4

  • ZNU4 Sell Implied price 0.015+(107’122-107’000)+120=120.137

• Implied source 2 - FYN 01-01 U4 and ZNU4 

  • ZNU4 Sell Implied price 0.065+(121.070-120.998)+120=120.137

When 

• ZFU4 Buy Aggressor arrives for 500@121.070

• Implied ICS priority:

Then

CME Globex creates two trades:

• ZFU4 aggressor first trades with FYN 01-01 U4.

• ZFU4 aggressor then trades with FTW 01-01 U4. 

• This is determined by the FYN product code (FYN), which has the lowest ICS product code priority.

Last Trade Date of the Front Leg of the Spread

If two spreads have the same strategy type priority, the spread with the earliest expiration trades first.

Example: Last Trade Date of Front Leg

Given

Implied source 1 = Sell ZCZ4-ZCH5 and Buy ZCZ4 (Implied bid in ZCH5).

Implied source 2 = Buy ZCH5-ZCH6 and Buy ZCH6 (Implied bid in ZCH5).

Then

Implied source 1 gets priority as ZCZ4-ZCH5 spread has the earlier expiration date than ZCH5-ZCH6 spread.

Last Trade Date of the Subsequent Leg of the Spread

If two spreads have the same last trade date on the front leg, the spread with the earliest last trade date of the subsequent leg has priority.

Example: Last Trade Date of Subsequent Leg

Given

Implied source1 - Buy ZC:BF Z4-H5-K5, Buy ZCH5 and Sell ZCK5 (Implied bid in ZCZ4).

Implied source2 - Buy ZC:BF Z4-H5-N5, Buy ZCH5 and Sell ZCN5 (Implied bid in ZCZ4).

When

• Both spreads are Butterfly(BF) with the same expiration date;

• The expiration date of the front leg of both BF spreads are the same;

Then

• Compare the expiration date of subsequent leg of both BF spreads; ZCK5 and ZCN5.

• Implied source 1 gets priority as ZCK5 is expired earlier than ZCN5.

Number of Spread Legs

If two spreads have the same last trade date of the subsequent leg, the implied source with the most legs trades first; i.e., a butterfly spread trading against two calendar spreads will trade ahead of the same butterfly trading against one calendar spread.

Last Trade Date of the Subsequent Spread

If two spreads have the same number of spread legs, the spread with the earliest last trade date of subsequent spreads trade first.

Example: Last Trade Date of Subsequent Spread

Given

Implied source1 - Buy CLU4, Sell BZU4 and Sell CLF5-BZF5 Inter-Commodity Futures (IS) spread (Implied bid in CL:BZ U4-F5 - Inter-Commodity (IP) spread).

Implied source2 - Buy CLU4-BZU4 IS spread, Sell CLF5 and Buy BZF5 (Implied bid in CL:BZ U4-F5 IP spread).

When

Both spreads are 1st generation with:

• same strategy type (IS) priority

• same number of spread legs

Then

• Compare the expiration date of both IS spreads:  CLF5-BZF5 and CLU4-BZU4.

• Implied source 2 gets priority as CLU4-BZU4 IS spread is expired earlier than CLF5-BZF5 IS spread.

Security Identification Number

If two spreads have the same last trade date of subsequent spread, the spread with the lowest Security ID (tag 48-SecurityID  in the MDP 3.0 Security Definition (35=d) message) trade first.