Lets say you received an large order that asks you to complete buying 100K lots at settle(of course you quote the client the settle price), what would you do? My feeling is that you probably just wait until settle and dump the orders to the market, because you are effectively the settle. But can you do better?
of course I can think of buying in front of that on my own account, and then sell at settle, ... but that's front-running and is illegal I think... What else can I do? Any thoughts? Can I use the "Trade-at-Settle" order type?
Will I be able to pre-determine today's settle using my huge order? And can I do anything on the option front? (but that's still considered as front-running, I guess)
Hi Losemind. Do you really mean 100,000 lots? i.e. 100,000,000bbls!? or do you mean 100k bbls, i.e. 100 lots? As I look at it now Nymex crude has traded 190,500 lots so far all day. 100,000 lots is a HUGE settlement order. The things you speak of are indeed illegal. Am I right in assuming you are a broker or is this a completely hypothetical question?
It's hypothetical of course... and of course I am not a broker - I am a retail level trader... Just wanted to understand the practices and what are legal and what are illegal... Anybody please explain the practices?
Trading at settlement is available for spot (except on the last trading day), 2nd, 3rd and 7th months and subject to the existing TAS rules. Trading in all TAS products will cease daily at 2:30 PM Eastern Time. The TAS products will trade off of a "Base Price" of 0 to create a differential (plus or minus 10 ticks) versus settlement in the underlying product on a 1 to 1 basis. A trade done at the Base Price of 0 will correspond to a "traditional" TAS trade which will clear exactly at the final settlement price of the day. http://www.cmegroup.com/trading/energy/crude-oil/light-sweet-crude_contract_specifications.html See also this advisory for TAS on spread trades - http://www.cmegroup.com/tools-information/lookups/advisories/clearing/files/Chadv10-50.pdf
Sure, no problem. I doubt very much that that order would get filled via TAS method. That would obviously be the safest way with smaller sized orders, even if you had to pay TAS+2 etc. If you give it to brokers on a not held basis, they may try and beat settlement for you by judging the market during the settlement window and buying accordingly, but it's a dangerous game with the current volatility. The size you're talking about is huge. I don't know whether they'd try and do some kind of OTC deal on the quiet, but as soon as the market got wind that there was a big MOC order, you'd have your work cut out. To be honest I think it might be better to discuss a more realistic order size, say 1,000 lots..... to which I would still always trade TAS, TAS+1, TAS+2 etc. Hope that helps.
I'm not entirely sure. Perhaps they sold TAS and then used ultra high frequency trading strategy to push the market up in the minutes preceeding the Settlement by jumping quickly infront of any orders thus making other people also chase up the market to get their orders done. They then bank a profit between their average buying price and the published settlement price?
Thanks. In fact I was wondering what can a broker illegally do facing a 100K lots WTI order? And what can a broker legally do facing such an order? What are the lines between legal and illegal practices? (assuming the broker is really greedy)