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CME Cancellation fees

CME Cancellation fees (and what it means to you)

If you go to the CME web site and read this page:

You will come across the following text:
Effective April 18, 2005 CME will institute a new Messaging Policy which creates fair business guidelines by which customers will receive a surcharge for overly high message rates sent to the CME Globex platform. The policy has been tailored to the needs of each market. CME will define benchmarks based on a two-dimensional approach per product: Message Quality (Trade Ratio) and Liquidity (Volume Ratio). Each Class A firm (active or inactive clearing member firms which maintain relationships with the CME Clearing House) must not exceed product specific benchmarks based on the following ratios:

Message Quality or Trade Ratio: The Trade Ratio is based on the number of messages (orders, modifies and cancels) submitted for each matched trade. To calculate the Trade Ratio benchmark for a given product, CME will compare the total messages to matched transactions during RTH hours and factor in a percentage variation. The Trade Ratio cannot exceed a limit of 25:1.
Liquidity or Volume Ratio: The Volume Ratio is based on the number of messages submitted for each executed contract. To calculate the Volume Ratio benchmark for a given product, CME will compare the total messages to volume during RTH hours and factor in percentage variation. The Volume Ratio cannot exceed a limit of 25:1.
Product benchmarks will be calculated based on the aggregate of all messages and trades during the first fifteen (15) business days of the prior month and will be posted to this web page to apply to the following month.

If a Class A firm does not pass both of the above tests they will be issued two "warnings" within a rolling thirty (30) business day period. A $2,000 surcharge, per product, per session, per Class A firm will be applied where the Trade Ratio or Volume Ratio is exceeded and the two warnings have been exhausted. CME-designated Market Makers will be assigned different benchmarks.

CME will provide each Class A firm with reports T + 1 for violations which contain trading activity information for the Class A firm segregated by product, with a pass/fail status.

CME will implement this policy beginning Monday, April 18, without surcharges. Surcharges (with the two session warnings) will begin effective Friday, July 1, 2005.

Product Benchmarks
Each month's product benchmarks will be posted to the web on this page. Please see sample product benchmarks derived from March's trading activity.

Automated Trading Systems (ATS)
Although this policy does not specifically target ATS, all users of ATS systems that are active in CME Globex products must register their system with CME using the new Schedule 8 of the CME Customer Connection Agreement. The executed Schedule 8 must be returned to your CME Globex Account Manager no later than April 18, 2005 for existing ATS, and prior to implementing any new ATS. An ATS is an electronic system or computer software which is programmed to generate and send orders into CME Globex in an automated or semi-automated fashion.

What does this mean for you?

Your broker may have implemented a fee for cancellation orders that will impact your trading performance. At the time of writing this, 31 May 2005, Interactive Brokers (IB) have implemented a policy of a $5 credit for each executed order and a $1 penalty for each cancelled or modified order.

In most cases, when performing normal day trading, it will not really effect your results. The debit and crediting system, used by IB, will be computed on a daily basis. So at the end of day the Orders that were modified or Cancelled are counted against the number of executions. For Globex every execution credits $5 and every modify/cancel debits $1. So when using a Strategy with 3 native Globex Orders: (Open, Target and StopLimit), it will take 2 executions, and one OCA-cancel, makes $5 + $5 - $1 = $9. That effectively means that you can do 9 modifications before getting a negative fee-result. Most traders will not modify every trade 9 times, and when trading many more turnarounds a day, this fee-balance will become more positive (which makes an occasional trade of 20 modifies no problem at all).

Why have they implemented this fee structure?

These fees are meant to oppose spoofers and automated trading systems that manipulate the book by entering irrational orders without the intention to executed. And it will effect auto-spreading systems, which are chasing the market without executing but slowing down the servers at the exchange.

I hope this helps everyone understand the new policy.

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