Regulatory Circular RG14-048
Date:
December 2, 2014
To:
CFE Trading Privilege Holders (TPHs)
From: CFE Business Development
RE:
Spread Orders
Effective Date of CFE-2014-17
CBOE Futures Exchange, LLC (CFE) recently submitted CFE Rule Certification Number CFE2014-017 (CFE-2014-17) regarding spread orders. This circular is being issued to notify TPHs that the
rule changes included in CFE-2014-17 will become effective on Sunday, December 14, 2014, with the
one exception noted in the following paragraph. This circular also updates and replaces CFE Regulatory
Circular RG13-15 regarding spread orders on CFE.
The one rule change in CFE-2014-17 that is not being made effective is the change that would
have allowed for the submission of immediate or cancel (IOC) spread orders. CFE will not be modifying
its trading system at this time to be able to accept IOC spread orders. Accordingly, effective on
December 14, 2014, the language of revised paragraph (c) of CFE Policy and Procedure II (Spread
Order Processing) of the Policies and Procedures section of the CFE Rules will read: “Spread Orders
may not be submitted with any of the contingencies set forth in Rule 404(h).” This includes the IOC
contingency as well as the fill or kill and stop limit contingencies.
Primary Changes Included in CFE-2014-17
The primary changes included in CFE-2014-17 that will become effective on December 14, 2014
are:
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Various references in CFE’s Rules to the term “contract month” are being replaced with the term
“contract expiration” to capture all CFE products regardless of whether they expire monthly or
weekly.
A “strip” is now defined as a type of spread order. The effect of this change is that strips may
now be executed through CFE’s trading system in CFE’s centralized market, in accordance with
the parameters described below, instead of solely as Block Trades.
Block Trades in CBOE Nasdaq-100 Volatility Index (VXN) futures may now be executed as
strips. The minimum Block Trade quantity for a VXN strip will be 150 contracts and each leg of
the strip will be required to have a minimum size of 50 contracts.
• Block Trades could already be executed as strips in CBOE Volatility Index (VIX) futures,
CBOE Short-Term Volatility Index (VXST) futures, CBOE Russell 2000 Volatility Index
(RVX) futures, and CFE’s Volatility Index security futures products. Block Trades can also
be executed as strips in CBOE/CBOT 10-Year U.S. Treasury Note Volatility Index (VXTYN)
futures. The minimum size requirements for Block Trades executed as a spread order
(including as a strip) are discussed below.
Additional information is being added to CFE’s Rules regarding how spread orders are
processed. In particular, CFE Policy and Procedure II is being updated to include further
information relating to how spread orders interact with individual orders and quotes in the legs of
a spread and how spread orders interact with other spread orders.
The rule provisions noted below are described in the manner in which they will be in effect on
December 14, 2014.
What is a Spread Order?
CFE Rule 404(g) defines a “spread order” as an order to simultaneously purchase, sell, or
purchase and sell at least two Contracts in a form accommodated by CFE’s trading system. At this time,
CFE’s trading system accommodates spread orders that are in multiple expirations of the same CFE
product and does not accommodate cross-product spreads.
A “strip” is a type of spread order that is exclusively for the purchase or exclusively for the sale of
at least two Contracts in a form accommodated by CFE’s trading system. As with other types of spread
orders, strips accommodated by CFE’s trading system are limited to strips with multiple expirations in the
same product and may not be across products.
All references to spreads orders below include reference to strips unless otherwise noted.
Requirements for Spread Orders Entered into CFE’s Trading System
A spread order entered into CFE’s trading system must be in a form permitted by CFE. CFE
currently permits the entry of the following types of spread orders into CFE’s trading system:
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two-legged spreads where the ratio of the number of contracts in one leg to the number of
contracts in the other leg is 1:1 and 1:2;
three-legged spreads where the ratio is 1:1:1 or 1:2:1;
four-legged spreads where the ratio is 1:1:1:1.
If Trade at Settlement (TAS) transactions are permitted in a CFE product, they may only be
executed as two-legged spreads where the ratio of the number of contracts in one leg to the number of
contracts in the other leg is 1:1.
IMPORTANT NOTE:
CFE’s trading system does not electronically enforce the ratio
requirements for spread orders. TPHs are advised to ensure that spread orders submitted to CFE’s
trading system are within the permissible ratios.
Creation of Spread Orders
TPHs should not attempt to create spreads on their own in CFE’s trading system and should
request that the Help Desk do so in order to minimize the potential for error in spread creation.
When a new CFE product expiration is listed, the CFE Help Desk generally creates all calendar
spread combinations involving the new expiration prior to the opening of trading on the business day of
the listing.
If a TPH would like a type of CFE spread to be created that is not already available in CFE’s
trading system, the TPH should contact the CFE Help Desk at (877) 226-3773 or [email protected]
to request the creation of the spread.
Execution of Spread Orders
A spread order will be fully or partially executed against individual orders or quotes in the legs of
the spread that are residing in CFE’s trading system as long as (i) the spread order can be executed in
full (or partially executed while maintaining the ratio of the spread order for the unexecuted portion)
against the individual leg orders and quotes residing in CFE’s trading system and (ii) the width of the
prevailing market for each leg of the spread does not exceed the applicable Threshold Width for the
relevant Contract. Clause (ii) of the preceding sentence does not apply to TAS spread orders. The
Threshold Width for a Contract is set forth in the CFE contract specification rule chapter for that
Contract.
A spread order will be fully or partially executed against an opposite side spread order that is
residing in CFE’s trading system as long as (i) the spread order is not able, or is no longer able, to
execute against individual leg orders and quotes residing in CFE’s trading system and (ii) the width of
the prevailing market for each leg of the spread does not exceed the applicable Threshold Width for the
relevant contract. Clause (ii) of the preceding sentence does not apply to TAS spread orders.
Requirements for Spread Orders Executed Outside of CFE’s Trading System as Block
Trades
Block Trades executed as a spread order other than a strip: (1) must have one leg that meets
the minimum Block Trade quantity for the applicable CFE product, and (2) the other leg(s) must have a
contract size that is reasonably related to the leg meeting the minimum Block Trade quantity. If a Block
Trade is executed as a spread order that is a strip, the minimum Block Trade quantity for the strip and a
minimum quantity per leg must be met. The applicable CFE contract specification rule chapter and CFE
Regulatory Circular RG14-047 (as amended from time to time) set forth the specific size requirements
applicable to spread orders executed as Block Trades in each CFE product in which spread order Block
Trades are permitted. Spread orders executed as Block Trades are not required to satisfy the
permissible ratios for spread orders executed in CFE’s trading system because Block Trades are
executed outside of that system. CFE Rule 415 includes additional requirements applicable to Block
Trades.
Refer to CFE Rules for Additional Detail
This circular is not intended to provide a comprehensive description of CFE-2014-17 and CFE’s
rule provisions relating to spreads. TPHs should refer to CFE-2014-17, CFE Policy and Procedure II,
and other applicable CFE Rules for additional detail.
Additional Information
Operational questions related to the creation and submission of spread orders should be
directed to the CFE Help Desk at (877) 226-3773 or [email protected]. Questions regarding the
rule requirements related to spread orders should be directed to the Regulatory Services Division’s
Regulatory Interpretations and Guidance Team at [email protected] or (312) 786-8141.
(Replaces CFE Regulatory Circular RG13-15)