CME: "Stop with Protection" Rule

[ondafringe]

As a relatively new trader, until a few days ago, I was unaware of the CME's "Stop with Protection" Rule. I've read up on the rule and think I have a pretty good understanding, but would like some clarification from more experienced traders on one aspect of that rule.

Let's use ES for this discussion.

Let's say I short ES at 2900 and I place a Buy Stop at 2905. The market goes down a bit and at 4:00 PM CT, I'm up 6 points on the trade and I decide to keep my position open during the one hour close to see what the evening session does.

During the one hour closure, the guy in the White House tweets something that makes the market go bonkers with joy, and when the market starts trading again at 5 PM CT, the price gaps up and opens at 2930, completely jumping my Buy Stop.

As I understand the CME rule, my Buy Stop at 2905 automatically becomes a Buy Stop-Limit at 2908, calculated by taking one half the Non-Reviewable Trading Range for ES and adding that to the original Buy Stop price. The Non-Reviewable Trading Range for ES is 6 points, so adding 3 points to my original 2905 Buy Stop gives me a Buy Stop-Limit at 2908.

As I further understand, if the market does not trade "through" with enough liquidity that allows me to get filled between 2905 and 2908, my position remains open and my 2908 Buy Stop-Limit just sits there waiting until the market returns to its senses and price drops back down to 2908, where my Buy Stop-Limit would be filled and I would lose 8 +/- points on the trade.

But what happens if the market does not come back down to 2908, ever?

At some point, the trade has to be resolved. My account would continue to rack up horrible losses. I would be buried in margin calls. That is the reason I only use Stops, never Stop-Limits. And yet,in the above scenario, I would be stuck in an untenable situation all because of the CME's "Stop with Protection" Rule.

This is not making any sense to me. Am I missing something about how that CME rule works?

And I know the rule is in effect because I can see my Stop order with a Price1 and Price2. Price1 being my original Stop price and Price2 being 3 points further away as the Stop-Limit price.

I would post links to what I've read about the rule, but this is my first post, so I am probably not yet trustworthy.

George

 

[MattZ]

Per your example, 2908 becomes a Buy Limit (not Buy Stop Limit) if the market is at 2930.

 

[p0box4]

But what happens if the market does not come back down to 2908, ever?

You still have to close the position, obviously.

Either with a new order, move the current one up or wait until a margin call happens .

 

[virtusa]

As a relatively new trader, until a few days ago, I was unaware of the CME's "Stop with Protection" Rule. I've read up on the rule and think I have a pretty good understanding, but would like some clarification from more experienced traders on one aspect of that rule.

Let's use ES for this discussion.

Let's say I short ES at 2900 and I place a Buy Stop at 2905. The market goes down a bit and at 4:00 PM CT, I'm up 6 points on the trade and I decide to keep my position open during the one hour close to see what the evening session does.

During the one hour closure, the guy in the White House tweets something that makes the market go bonkers with joy, and when the market starts trading again at 5 PM CT, the price gaps up and opens at 2930, completely jumping my Buy Stop.

As I understand the CME rule, my Buy Stop at 2905 automatically becomes a Buy Stop-Limit at 2908, calculated by taking one half the Non-Reviewable Trading Range for ES and adding that to the original Buy Stop price. The Non-Reviewable Trading Range for ES is 6 points, so adding 3 points to my original 2905 Buy Stop gives me a Buy Stop-Limit at 2908.

As I further understand, if the market does not trade "through" with enough liquidity that allows me to get filled between 2905 and 2908, my position remains open and my 2908 Buy Stop-Limit just sits there waiting until the market returns to its senses and price drops back down to 2908, where my Buy Stop-Limit would be filled and I would lose 8 +/- points on the trade.

But what happens if the market does not come back down to 2908, ever?

At some point, the trade has to be resolved. My account would continue to rack up horrible losses. I would be buried in margin calls. That is the reason I only use Stops, never Stop-Limits. And yet,in the above scenario, I would be stuck in an untenable situation all because of the CME's "Stop with Protection" Rule.

This is not making any sense to me. Am I missing something about how that CME rule works?

And I know the rule is in effect because I can see my Stop order with a Price1 and Price2. Price1 being my original Stop price and Price2 being 3 points further away as the Stop-Limit price.

I would post links to what I've read about the rule, but this is my first post, so I am probably not yet trustworthy.

George

You have the answer yourself:"That is the reason I only use Stops, never Stop-Limits."

Why break your head on something you should not use?

 

[ondafringe]

Once I wrote all that up, and then got a good night sleep, it all came clear this morning.

virtusa: The Stop-Limit is being forced on me, and everyone else, by the exchange.

RDK91: lol... I think the only possible total disaster would be if the scenario I presented happened overnight, while you were in bed asleep, thinking your Stop had your covered... or something similar.

MattZ: Thanks for the correction.

I appreciate everyone taking the time to respond. Thanks!

 

[virtusa]

virtusa: The Stop-Limit is being forced on me, and everyone else, by the exchange.

I appreciate everyone taking the time to respond. Thanks!

I daytrade and I am only forced to put a STOP, not a stop-limit. Why? Because a stop is a stop that is executed. A stop-limit does not work the same as you know.

 

[jules190]

I daytrade and I am only forced to put a STOP, not a stop-limit. Why? Because a stop is a stop that is executed. A stop-limit does not work the same as you know.

I've traded futures for a decade and was of the same impression as you. However after reading this post I looked into it and it turns out there is no such thing as a stop market on CME and ICE, there is only stop limit and 'stop with protection'.

Apparently there is a maximum amount of slippage that you can get on a 'stop with protection' before the order will be rejected. It's quite large, I think I read it was five points in GC, two and half points in CL, and six points in ES.

Happy to be corrected if this is wrong.

https://www.cmegroup.com/education/...-trading-cme-futures/futures-order-types.html

"The stop order type is an order which, when accepted, does not immediately go on the book, but must be triggered by a trade in the market at the price level submitted with the order. There are two types of stop orders: stop-limit, which goes on the book as a limit order when activated, and the stop with protection, which goes on the book as a market order.

A stop order with protection prevents stop orders from being executed at extreme prices. A stop order with protection is activated when the market trades at or through the stop trigger price and can only be executed within the protection range limit."

https://www.danielstrading.com/2013/11/25/why-stops-become-limit-orders-on-cme-globex-ice

 

[ondafringe]

virtusa: Yes, I thought the very same thing!

jules190: As I understand it, the exchange adds 1/2 the Non-Reviewable Trading Range (NRTR) for the given instrument to your original Stop and places a Stop-Limit at that price. For ES/MES, the NRTR is 6 points, so 3 points would be added for the Stop-Limit.

I understand the reasoning behind the rule, but if they are going to do that, why not just do away with Stops completely and force traders to use Stop-Limits? That way, everyone knows what's going on. I've only been trading for 8 1/2 months and stumbled upon this accidentally a few days ago. I doubt most traders are even aware of this.

Plus, it seems that adds another layer of risk to trading for those who do not actively monitor their position (probably not advisable) thinking their Stop is protecting them. And in most cases, it does protect them, but on that rare occasion, it could be disastrous. I suppose the answer is to set some kind of alert so, if your Stop price is hit or jumped, you get an alert so you can check in on your trade.

 

[ondafringe]

And for those who are not aware of the Stop-With-Protection Rule, you can download a spreadsheet with all the NRTRs for the different instruments on the CME (not sure about ICE).

I can't post links, but if you search for the "STOPS, SLIPPAGE AND STOP JUMPING" article on Daniel's Trading, he provides a link to his spreadsheet in that article.

 

[schizo]

But what happens if the market does not come back down to 2908, ever?

At some point, the trade has to be resolved. My account would continue to rack up horrible losses. I would be buried in margin calls. That is the reason I only use Stops, never Stop-Limits. And yet,in the above scenario, I would be stuck in an untenable situation all because of the CME's "Stop with Protection" Rule.

Check with your broker. Many will hold your stop on their server and will execute once prices breach above or below your stop.