Curiosity about Future & FOP margin costs

[cjbuckley4]

Simple question but apparently a tough answer to find if you have no live trading experience:

How do CME and/or FCMs treat GTC limit orders w/r/t margin costs? Does available margin decrease at the time the trader places the order or does it only decrease in the event their order is matched?

My intuition is that it's most likely necessary for FCMs to require margin prior to posting the limit order but then I wonder about the case of pro rata products. Consider the case of making markets in a pro rata product. If, say, a hedge fund were to have a ton of cash to finance margining would they not be at a major advantage vs. smaller prop traders because they could afford to quote more size and thus they would be entitled to a larger chunk of the order flow? Now obviously I'm painting in very broad strokes, but if that's the case why is it that a lot of the Chicago prop shops are into making markets in treasuries when it would appear that better capitalized traders such as hedge funds would have an advantage? Maybe I'm missing something but I'd love to have this apparent contradiction explained.


Thanks

 

[Robert Morse]

cjbuckley4,

The CME does not bother with your margin on open orders. They focus on end of day positions, so this is not an issue for the CME. You broker needs to set limits. You broker will limit either you margin, including open positions and orders based on SPAN margin-or whatever risk reduced offering they have, or by number of contracts set by your FCM or broker. Open positions and open order would be included against your limit.

For a prop firm or any automated market maker, they would get limits too, based on what systems the FCM has set up. That will very from FCM to FCM.

Bob

 

[Deuteronomy_24_7]

The CME does not bother with your margin on open orders

Nor about anything else at the customer level. Exchanges operate at the FCM level.

 

[MattZ]

Simple question but apparently a tough answer to find if you have no live trading experience:

How do CME and/or FCMs treat GTC limit orders w/r/t margin costs? Does available margin decrease at the time the trader places the order or does it only decrease in the event their order is matched?

Thanks

To simplify it a bit....Open orders occupy your margins when you trade. Essentially, it's like this: Assume you are long 1 ES contract. If you place a limit order for another long contract, then the margins by FCMs would count as though you have 2 contracts filled. This is because there is a potential for a fill, regardless of the likelihood. This is how FCMs treat the risk side and of course each data feed has its own risk parameters. Therefore, you need enough capital for both open and filled positions as you trade throughout the day. You can request lower margins for day trading, so limit order occupy less of your margins.

As stated above, the CME on other hand would only look at the end of the day at your current open positions.

I hope this helps.

 

[cjbuckley4]

Thanks as always @Robert Morse and @MattZ for the clarification.

Indeed I was mistakenly thinking in terms of a dollar denominated margin cost for each contract vs. the actual 'number-of-contracts-per-product' risk limit system that FCMs enforce.

These explanations and example have clarified that it is indeed at the time the limit order is entered that the margin or, more correctly, the risk limit penalty is assessed.

 

[CannonTrading_Ilan]

It depends on the FCM and the trading software you use. Some FCM will use max order size/ max position size. Some will use a percent of overnight margin and working orders will count as possible positions, hence take away buying power and yet some will ignore working orders and only use the buying power and open positions....I know it is somewhat a general answer but working with 5 different FCMs as an Independent Introducing Broker allows me to see the different ways this is addressed. We will set up client based on their trading needs/goals...feel free to PM me or visit our website.

 

[Robert Morse]

It depends on the FCM and the trading software you use.

I agree. Some of our platforms are SPAN margin based and some are contract limits.

 

[MattZ]

Most FCMs just follow the risk side as it is given to them by the data feed providers. They dont deviate

Thanks as always @Robert Morse and @MattZ for the clarification.

Indeed I was mistakenly thinking in terms of a dollar denominated margin cost for each contract vs. the actual 'number-of-contracts-per-product' risk limit system that FCMs enforce.

These explanations and example have clarified that it is indeed at the time the limit order is entered that the margin or, more correctly, the risk limit penalty is assessed.

Keep in mind that Limit orders that are liquidating orders should not count towards margins. When it comes to Limits, always consider whether its a new position or not. So for example, long position with an OCO of Stop and Limit, should not take more margins. Both are liquidating orders.

 

[cjbuckley4]

Most FCMs just follow the risk side as it is given to them by the data feed providers. They dont deviate


Keep in mind that Limit orders that are liquidating orders should not count towards margins. When it comes to Limits, always consider whether its a new position or not. So for example, long position with an OCO of Stop and Limit, should not take more margins. Both are liquidating orders.

Maybe these are questions that I should be directing to specific data feed providers in that case. It would seem to me that it might be passable for futures, but I imagine having each working order count against risk limits would pretty much be a dealbreaker for any flavor of option market making because you're just working too many orders on too many strikes.

 

[MattZ]

Maybe these are questions that I should be directing to specific data feed providers in that case. It would seem to me that it might be passable for futures, but I imagine having each working order count against risk limits would pretty much be a dealbreaker for any flavor of option market making because you're just working too many orders on too many strikes.

Indeed you need to discuss this with data providers, but I can help you because I am familiar with Options margins on a number of data feeds and the the "culture" of the FCM towards risk. So data feed could provide one set of parameters and the FCM could apply higher level of margins. You need a combination of both to work for you.

Keep in mind that lenient policies of margins also depend on your history with the brokerage.