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Block trades with the CME
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Block trades with the CME

  #1 (permalink)
Market Wizard
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Block trades with the CME

On the CME site they state:

Quoting 
A Block Trade is a privately negotiated futures, options or combination transaction that is permitted to be executed apart from the public auction market.

What does this mean, that they can execute large trades apart from the public auction?

Here is the link: Block Trades

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  #3 (permalink)
Swings a big hammer
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These are privately negotiated transactions between large institutional accounts and their brokers. Sometimes these trades have multiple legs, like simultaneously selling ZF to buy a duration-neutral equivalent of ZB. Executing trades like that can get a bit sloppy or expensive if you have several thousand lots to do per side and need to maintain hedge ratios, so that's when you just pick up the phone and call your broker to get it done quickly and efficiently at one price.

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  #4 (permalink)
Market Wizard
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Bladesmith View Post
These are privately negotiated transactions between large institutional accounts and their brokers. Sometimes these trades have multiple legs, like simultaneously selling ZF to buy a duration-neutral equivalent of ZB. Executing trades like that can get a bit sloppy or expensive if you have several thousand lots to do per side and need to maintain hedge ratios, so that's when you just pick up the phone and call your broker to get it done quickly and efficiently at one price.

I'm confused. From the cme wording it sounds like big orders can be executed off the exchange? I get that an organisation could have a big order so they pass it to a broker who gets it into the market gracefully but what does that have to do with the cme?

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  #5 (permalink)
Swings a big hammer
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Yes block trades are executed off exchange but still sent to the CME for central clearing

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  #6 (permalink)
Market Wizard
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Bladesmith View Post
Yes block trades are executed off exchange but still sent to the CME for clearing

I see. Is it the cme that hides the big orders in the form of icebergs and absorbtion levels so that no one can see them?

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  #7 (permalink)
Swings a big hammer
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Grantx View Post
I see. Is it the cme that hides the big orders in the form of icebergs and absorbtion levels so that no one can see them?

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No, all orders sent to the exchange can be viewed by all data subscribers in real time. Icebergs are handled on the customer side, and "hide" the full size by breaking a large order into smaller lots that are sent to the exchange only when the prior lot gets executed. This is entirely unrelated to block trades.

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  #8 (permalink)
Market Wizard
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Bladesmith View Post
No, all orders sent to the exchange can be viewed by all data subscribers in real time. Icebergs are handled on the customer side, and "hide" the full size by breaking a large order into smaller lots that are sent to the exchange only when the prior lot gets executed. This is entirely unrelated to block trades.

Awesome. Clears that up. Thanks for explaining.

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  #9 (permalink)
Market Wizard
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Agree with pretty much everything @Bladesmith said.

Couple of things I would add...
  • Block Trades aren't limited to CME, most exchanges have some equivalent. While exchanges always had EFP's (Exchange for Physical, literally exchanging a futures position for a physical position) I believe that ICE were the pioneers of clearing off-exchange executed OTC (over the counter) trades. In fact the original ICE trading system (pre them buying the IPE) was a hybrid system that actually allowed both bilateral (ie non-cleared) and cleared swaps trading on the same platform. This was all well before NYMEX/CME launched Clearport.
  • To participate in Block Trades I believe you need to be an ECP (Eligible Contract Participant). While the criteria for this are probably onerous for a retail trader, you don't have to be a large institution. I can and do participate in this market. For CME energy futures the minimum block trade size is 50 lots. On ICE you can block trade Natural Gas trades as small as 25 lots, which given that ICE contracts are a quarter the size of standard NYMEX contracts, means this is equivalent to just 6.25 NG lots! In the energy space alone there are dozens of brokers that specialize in these transactions.
  • In the energy space the majority of trades that are executed off exchange and then blocked and cleared on exchange fall into three categories
    1. Transactions significantly larger than would be seen on exchange. (ie 500 or 1000 lot blocks)
    2. Spreads or Structures that are difficult to trade on exchange. Obvious examples include
      • Cross Exchange Trades - eg NYMEX vs ICE
      • Option Structures
      • Strips or Bundles of Products (ie something like Cal 2018 vs 2019 spread, which would involve buying all 12 months in 2018 and selling all 12 months in 2019 all as one deal)
    3. Products that have never traded electronically but still trade over the counter. ie Calendar Month Average Swaps, Locational spreads, Gulf Coast-New York Harbour etc, Product spreads, Mars-WTI etc.


Last edited by SMCJB; February 20th, 2017 at 11:07 AM. Reason: changed two reasons to three reasons
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  #10 (permalink)
Market Wizard
Reading UK
 
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SMCJB View Post
Agree with pretty much everything @Bladesmith said.

Couple of things I would add...
  • Block Trades aren't limited to CME, most exchanges have some equivalent. While exchanges always had EFP's (Exchange for Physical, literally exchanging a futures position for a physical position) I believe that ICE were the pioneers of clearing off-exchange executed OTC (over the counter) trades. In fact the original ICE trading system (pre them buying the IPE) was a hybrid system that actually allowed both bilateral (ie non-cleared) and cleared swaps trading on the same platform. This was all well before NYMEX/CME launched Clearport.
  • To participate in Block Trades I believe you need to be an ECP (Eligible Contract Participant). While the criteria for this are probably onerous for a retail trader, you don't have to be a large institution. I can and do participate in this market. For CME energy futures the minimum block trade size is 50 lots. On ICE you can block trade Natural Gas trades as small as 25 lots, which given that ICE contracts are a quarter the size of standard NYMEX contracts, means this is equivalent to just 6.25 NG lots! In the energy space alone there are dozens of brokers that specialize in these transactions.
  • In the energy space the majority of trades that are executed off exchange and then blocked and cleared on exchange fall into two categories
    1. Transactions significantly larger than would be seen on exchange. (ie 500 or 1000 lot blocks)
    2. Spreads or Structures that are difficult to trade on exchange. Obvious examples include
      • Cross Exchange Trades - eg NYMEX vs ICE
      • Option Structures
      • Strips or Bundles of Products (ie something like Cal 2018 vs 2019 spread, which would involve buying all 12 months in 2018 and selling all 12 months in 2019 all as one deal)
      • Products that have never traded electronically but still trade over the counter. ie Calendar Month Average Swaps, Locational spreads, Gulf Coast-New York Harbour etc, Product spreads, Mars-WTI etc.

Thanks that is very interesting and a few new tidbits which I will spend time reading up on and exploring further.
I guess what Im still confused about is if someone has a 2000 lot order to be processed, how is 'blocking' it off exchange different to simply offering the order in smaller sizes to the exchange? Its the same thing isnt it? This is a process that obviously offers some advantage but I dont see what it is as there are now more steps involved with blocking and clearing off the exchange. If it has more to do with spread trading, calendar swaps, options etc then just tell me to shut up and I will go read further on those.

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