As a trader, when you click to enter an order, there are many processes that occur to have your order actualized before being filled and showing up in your account.
Once you click submit to enter an order, the order will move through a process of vetting. The order will be verified by your broker, sent to the exchange, where will be verified again and sent to a matching engine.
If the order is matched and filled, the clearing firms on each side of the order will complete the process by assigning contracts and transferring money.
Even though this happens instantaneously, the behind the scenes process is integral to ensure that market integrity is maintained.
The first step of the process includes verification by your broker to confirm the order meets account restrictions, such as contract type, number of contracts being traded and sufficient margin in your account to cover potential losses.
Brokers may also add other warnings or notices, including maximum contracts traded at one time, two-step order placement and price checks that do not allow buy orders to be placed above the offer price, or sell orders to be placed below the bid price to prevent over paying to reduce trader error. Additional safeguard features may be available, but vary by broker.
Once the broker has performed the verification steps, the order will be submitted to the exchange.
The exchange will verify the order to make sure it meets their requirements. If it does, the order is accepted and becomes a working order at the exchange.
Typically, you will see a confirmation in your trading account when the order has been accepted by the exchange and is active.
If the order is filled (when a buyer is matched with a seller or vice versa), you will see a notification from your trading platform that you are now holding the futures contract in your account.
You will now be able to keep track of your position in account management. During the exchange verification step, CME Group ensures orders meet specific requirements to maintain an orderly flow of the market. The exchange requires orders adhere to market and price requirements. It is these safeguards that ensure that markets operate in an orderly and fair manner.
Price banding is one such control. When limit orders are placed to buy or sell at a price too far away from the current price of the futures contract, they will not be accepted by the exchange.
For example, if the E-mini S&P 500 futures contract (ES) is trading at 2550 and a trader attempts to enter a limit order to buy at 2575, the order would be rejected as it is too far away from the current price and exceeds the price band.
Another price control that prevents orders from being filled if the market moves too far too fast is velocity logic.
If price moves more than a certain number of ticks in a defined time period, the matching of trades will pause to avoid orders being filled at extreme price levels.
The goal of price controls is to make sure that orders are not being placed and possibly filled at unrealistic prices creating potential to disrupt the market.
Daily Price Limits
Another market control reviewed during the exchange verification is Daily Price Limits. Price limits are defined by the exchange and limit a futures contract’s maximum upward and downward market movement in one trading day. Futures are allowed to trade up to, but not beyond, the Daily Price Limit. If the market reaches a limit (limit up or limit down), the market remains open, but will not trade outside the limits.
Circuit Breakers are temporary pauses as opposed to a hard limit.
CME Group has many controls and checks in place that each order must pass before it is accepted by the exchange. Because the controls are all completed behind the scenes in a matter of milliseconds, Traders will generally never notice these controls. What traders experience is quick seamless trade matching with the benefits of a robust trading process.
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