Interesting Events in Interest Rates

Don Dawson

As I write this article it is Christmas Eve.  To some this may seem a strange way to spend the day before Christmas.  Yet, one of the ways I have survived trading for so many years is to have a true passion for what I do.  This means a lifetime commitment to continuous education and willingness to make changes to adapt to the markets. Part of my article today is about an event that happened a couple of days ago.  I have been on the phone with broker friends around the country, trading buddies and the CMEGroup Exchange trying to find out what happened in the 30 Year Bond Futures contract on December 23, 2013.

Recently I wrote an article about Price Banding and Protective Limits for all orders placed on the electronic platforms of the CMEGroup, Globex, and ICE Exchanges.  This week another event happened on the CMEGroup Globex platform that I thought you may find interesting.

BondsWhile we may never know the exact cause of why the 30 Year Treasury Bond (US) Futures contract moved so quickly and almost immediately corrected, the CME acted promptly to assure the financial safety of its customers and to protect the integrity of the Futures markets.

On December 23, 2013 at approximately 2:30 a:m Eastern Time (-5 GMT) during a very low volume time of the session, traders or a trader placed the wrong types of orders on the Globex platform resulting in the market moving very quickly.

Before the orders were placed the US market was trading very calmly around 130-08.  Looking at a 1 minute chart you could see where the market rallied all the way up to 135-23 in just two minutes after the orders were placed!  Let’s put some dollar values around this move so you can see the significance.  Each handle (1 point) is worth $1,000 per contract.  This move in less than two minutes would have been valued at $5,468.75 per contract!

When I first saw this move I could only think that the Price Banding and Protective Limit rules would be set in place.  The reason I thought this was because I was looking at a 1 minute chart and the candles literally went straight up.  But when I created a 5 Tick chart (takes 5 price ticks to build a candle) I could see most of the trades that took place inside those 1 minute candles.  And amazingly the market did not move up in one trade, the market actually traded very rationally considering the time of day and low liquidity.  Therefore the Price Banding or Protective Limit rule did not apply.

However another rule did get implemented, rule 588.  This rule states that if a trader places improper orders on an electronic trading platform they have 8 minutes to notify the Exchange the platform trades on.  By doing this the trader or traders will not face penalties from the Exchange if the orders are found to be an accident.

Once the Exchange reviewed this activity they realized that this error caused invalid price action.  Instead of honoring all trades all the way up to 135-23 the CME Exchange said the highest price traded that would be honored was 131-12.  Now instead of a rapid price move of 5-15 (5 handles and 15/32’nds)($5,468.75) the honored move would be 1-08 (1 handle and 4/32’nds) ( $1,125.00).   This is still a big move in 2 minutes considering the 10 day average range for the US market was approximately 1-04 or $1,125.00.

You are probably wondering what happened to the orders above 131-12 that had been hit and traded?  After review by the CME Exchange the trades were busted (not honored), so if you had a stop or limit order above 131-12 the trades will not show up on your P&L statement as being filled.

My question to the CME was, does a trader with open orders that were filled and then busted need to do anything?  The answer was “Yes!”  Even though your orders would not have been filled it would be the traders responsibility to resubmit your original orders because they are no longer on the Globex platform.

Considering the magnitude of this move and how orderly it looked on a Tick chart, I have to say the CME Globex platform performed extremely well in keeping the US market from imploding.

Trade Station charting was quick to fix their charts and both Intra-Day and Daily charts were showing the correct high.

The other interesting event in the Interest Rate markets will be a change to one of the Interest Rate markets we trade using Trade Station symbols.  The Five Year Treasury Futures contract (FV).

As many of you know, trading supply/demand levels requires accurate prices on our charts to create dependable levels to trade from.  For this reason we only use continuous un-adjusted charts to plot the historical information of all of our Financial Futures contracts.  These include the Stock Indexes, Currencies and the Interest Rate markets.

Currently the 10 (TY) and 30 (US) year Treasury markets use the symbol that instructs Trade Station software to rollover your charts automatically 14 trading days before the contract expires.  This will usually fall within +/- 1 day of the First Notice Day for these two markets.  First Notice Day (FND) is the day all speculators must exit any open positions in that contract month or they could face having the Commodity delivered to them by the Exchange.  This even applies to the Currency and Interest Rate markets, not just the physical Commodity markets.

The following symbols will still be used for the TY and US markets respectively:

  • @TY=114XN
  • @US=114XN

The change will come with the Five Year Treasury Market (FV).  Due to the duration of this Treasury product the Futures contract actually expires much later than the TY and US.  All of the Interest Rate Futures contracts have the same FND, but they don’t all expire the same day.  This is where we as traders need to make an adjustment to the way we chart our un-adjusted continuous charts using Trade Station.

Currently we are using @FV=114XN, the same as the TY and US markets.  Looking over the contract calendar dates it is noticeable that there is a big enough difference between FND and the expiration day (LTD) of the FV contract.  The FV contract now has 23 trading days between FND and LTD which is how we create our chart symbols for un-adjusted continuous charts.

I would recommend that you make this adjustment to your charting and/or radar screen if you are a Trade Station user.  If you use another charting platform you do not need to do anything, it will be done automatically for you.

  • @FV=123XN

By using this symbol and leaving the TY and US symbols as they are you will see the chart rollovers occur on the same day and give you better quality candles and charts to plot your trading levels on.

Knowing this information will help you become a more rounded professional Futures trader.  I have always been curious of what goes on inside the market other than just reading charts.  To me this is another form of risk management.

“If you’re not making mistakes, then you’re not doing anything.”  John Wooden

– Don Dawson

This newsletter is written for educational purposes only. By no means do any of its contents recommend, advocate or urge the buying, selling or holding of any financial instrument whatsoever. Trading and Investing involves high levels of risk. The author expresses personal opinions and will not assume any responsibility whatsoever for the actions of the reader. The author may or may not have positions in Financial Instruments discussed in this newsletter. Future results can be dramatically different from the opinions expressed herein. Past performance does not guarantee future results. Reprints allowed for private reading only, for all else, please obtain permission.