Huge danger of not knowing CME cancelled your trade

Discussion in 'Index Futures' started by canadian_dude, Aug 8, 2003.

  1. I read an article online that got me thinking about the potential for massive losses the CME could inflict on a trader, without them even knowing it. Read about how the CME recently cancelled many trades here:

    Here is the important part:

    "The final-hour fade was apparently precipitated by an erroneous trade of S&P 500 E-mini futures. Late Monday, the Chicago Mercantile Exchange canceled all trades in the September E-Mini S&P contract below 996.00. At 3:08 p.m. EDT, a price drop occurred in E-mini S&P futures that lasted four seconds, and [sent E-mini prices] from 1000 to 990.50," according to Maryellen Theilen, a spokeswoman for the MERC. "The drop was triggered by a series of cascading stop orders during relatively thin market activity."

    OK, now here is the danger to the trader. Let's say you have a highly leveraged short position late in the day. You also have a buy order to close out the position, which gets taken out when the S&P emini drops 10 points in 4 seconds. You are happy to have been filled, and since its late in the day, you log off for the rest of the day, thinking you do not have a position.

    BUT WAIT....................

    The CME in its infinite wisdom, decides to cancel your trade, for the exact reason detailed in this article. But you don't know that has happened, you have stopped trading for the day. You don't find out the trade was cancelled until your daily statement arrives, sometime in the middle of the night.

    So you went to bed thinking you had no position, when in fact you had a highly leveraged short position. Now lets say the market gaps up at the open the next day by a huge amount like 5% for some reason like an economic report, geopolitical event, etc. And with your leveraged position, you have just lost 20%, 30%, 40% of your capital, the potential for loss is unlimited. There is so much margin power with the emini's, you could effectively have the potential to lose 100% of your money.

    And all because the CME cancelled your trade and you didn't know they had cancelled it. Am I missing something here? Because the thought of the CME cancelling trades for ANY reason is a very frightening scenario.

    And it also opens up the possibility of deliberate illegal market manipulation. If you know in advance the CME will cancel your next trade if you manipulate the market, all kinds of illegal cross-market arbitrade opportunities become a possibility.
  2. "paranoia self destrooooy yaaaaa....there's a little green man in your head...." :eek:

    Hey, just messing with you! That would really piss me off!!! :mad:

  3. The CME needs to put in a real time circuit breaker which is tied to the pit and monitored. No one should be put in a position where his/her position is reversed after the fact by an arbitrary rule when a solution could, in fact, be addressed in real time.

    You are also very correct that the opportunity for market manipulation is very real and the CME needs to investigate any opportunities which may have been illegaly exploited through the recalling of the transactions under 996. In our present reality, no chances need to be taken when it comes to these type of things.

    Good Call,

  4. I guess the smart thing to do would be to hand around after an unusual spike to make sure it is legit. One bad trade like this could wipe out a little fella like myself.
  5. Busting trades is a joke and should be outlawed IMO. But that's for another thread.

    We need to deal with the breaking of trades in our trading. Learn the rules regarding the breaking of trades. In the ES, it is a deviance of greater than 6 points from the price of the pit-traded S&P. Other contracts have other limits. So if you see ES way out of line (more than 6 points) with the S&P, you might not want to try to execute your order at the absolute best price until it bounces back a bit. I know that's a long shot as at that moment you will probably be so engrossed in just firing that order off that you won't know what happened until a bit later because it's moving so fast, and definitely won't have time to compare prices.

    Also, knowing this rule you will be able to see if your execution will be busted or not by comparing the low prices (in almost every case) of ES and SP, for instance and where your fill price is. If your fill is more than 6 points below the S&P low price it will be busted. If it's gonna be busted, no need to wait around - just get out again (go long) and let your broker sort it out.
  6. This scenario has happened to me.

    I feel that I pay commission to a middleman between myself and the exchange. I usually expect a reasonable service for this.

    Trading and fueling up my car is one of the only things in my life that I pay for and expect nothing as far as service.

    The correct procedure for this would be for the IB or FCM to contact those customers by email or phone to alert them to their broken trade. But who said life or trading was fair?

    Michael B.
  7. Fortunatly, since I am a CTA and block trading I was able to arbitrate it with Refco and Pat Systems to get 50% of the loss refunded.

    Michael B.
  8. The CME's policy is to break any trades that occur 6 pts. away from the floor on price spikes in the mini-sp.
  9. in my experience you usually know you got a gift trade and that should tell you to be prepared for a bust.every time i have had a trade busted i knew there was a possibility it would be busted ahead of time.
  10. that's why they need to get rid of the pit.
    #10     Aug 9, 2003