Locked-in Range Analysis: Why most traders must lose money in the futures market (Forex). Tom Leksey
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Size
Each futures contract has a standardized size that does not change.
Contract Value
Contract value is calculated by multiplying the size of the contract by the current price.
Product Code
The first two letters of a CME Globex (CME Group’s electronic trading platform, providing users across the globe with virtually 24-hour access to global markets) ticker symbol represent the underlying futures contract. The next letter in the ticker represents the month that the contract expires. The final number is representative of the the year the contract expires. Example: 6EH7 is a Euro FX (6E), March (X) 2017 (7) contract.
Contract Month
The month in which a futures contract expires. Delivery month is indicated by a letter: F – January; G – February; H – March; J – April; K – May; M – June; N – July; Q – August; U – September; V – October; X – November; Z – December.
Contract month contains the last trading day (settlement date) on which a futures contract may trade or be closed before delivery.
Tick Size
The minimum price change in a futures contract is measured in ticks. A tick is the smallest amount that the price of a particular contract can fluctuate.
Table 3. Contract specifications of most liquid currency, equity, energy, metals futures. Commodities contract months are the most active months for delivery according to volume and open interests. Specifications for all products traded through CME Group can be found at cmegroup.com
Settlement
Cash Settlement
At the end of the contract the holder of the position is simply debited or credited the difference between their entry price and the final settlement. (Example: the purchaser of an E-mini S&P 500 future is unable to take ownership of the index at expiration).
Physical Delivery
At the end of the contract the holder of the position will either have to deliver the physical commodity (if short) or take delivery (if long). The delivery payment is based on the contract's final settlement price.
The holder of the open long (buy) / short (sell) positions must inform their clearing firm that he intends to make delivery. Clearing firm is required to report to CME Clearing (the exchange clearing house) all open positions that will be delivered. CME Clearing then matches long clearing firm (or firms) to the short clearing firm, begins with long positions entered on the oldest vintage date.
1.3 Role and Capabilities of a Market Maker
Who Are Market Makers? (Definition by CME Group)
A market maker (one type of speculator) is an authorized customer permissioned to quote both the buy and sell side in a given market (while all other market participants may open positions only in one direction – unidirectional). The main function of the market maker is to provide liquidity to the marketplace (contractual agreement with CME), usually in exchange for a reduction in trading fees. Market makers often profit from capturing the spread, the small difference between the bid and offer prices over a large number of transactions.
Modern futures market cannot function without such a professional participant as a market maker, since 24-hour trades include illiquid periods when there are sharp imbalances in supply and demand, and if the market is allowed to determine prices independently in such periods, then we can observe increased volatility and price manipulation, which can be very significant and would be regarded by market participants as an increased trade risk, equivalent to an illiquid instrument; therefore, the stock exchange, in our case its CME Group, is interested in the presence of market makers, providing them with privileges in exchange for compliance with the established obligations to provide and maintain liquidity.
Responsibilities of Market Makers
During the specified period of the trading session (American, Asian-Pacific, European), the market makers must continuously maintain two-way futures quotes, observing the minimum volume of own orders agreed with the exchange and the spread between bid-ask quotes (widening of spread for periods of increased volatility is possible).
As counterparties to each transaction in terms of pricing, market makers must take the opposite side of your trade. In other words, whenever you sell, they must buy from you, and vice versa.
IMPORTANT. Why do market makers act as counterparties for most orders, but not for all? The rest of the transactions may temporarily be accumulated by other market participants, both with speculators and hedgers; however, over time, all open positions will pass on to market makers, when one of the parties of a transaction, in which the market maker does not participate, decides to close the position.
Capabilities of Market Makers
To understand the capabilities of market makers, one should know the limited market depth available to any participant: 1) Data featuring the nearest (best) placed 10 bid and 10 ask limit orders shows the price and number of contracts (Level 2). 2) Data featuring each transaction made shows the price, time, and number of contracts (Time & Sales).
CME Group market makers use the full market depth available to the exchange, namely:
1) Data featuring all existing placed limited orders
2) Data featuring all existing placed stop orders
3) Data featuring all open positions: price, volume, and side of order (buy/sell)
Figure 1. Net Positions (buy+sell) Market maker Order Book (Open orders, Open positions)
Market makers collectively create a market for each futures contract, centrally managing its common pool of positions to prevent conflicts of interest that would arise when working separately, when instead of earning the spread and self-quoting, market makers would get a large volume of positions that would not have a counterparty to close before the expiration of the futures. (Example: Speculator buys 1 cash settlement contract on the market, and his counterparty is Market Maker #1; then, the same speculator decides to exit the position and sell his contract; this time, his counterparty is Market Maker #2. As a result, the speculator does not have a position, and the market makers have 2 open positions that they can close only with each other; in this case, one of them will suffer losses).
Position Limits
CFTC monitors compliance with Commission or exchange speculative limits, which help prevent traders from accumulating large positions that could destabilize a market.
Table 4. Limits of max number of open positions by one account. Source: cmegroup.com
All Month Level / Single Month / Delivery Month will be calculated on a Net positions (the difference between total open long and open short positions in a given asset held by one account).
Reportable Positions
Clearing members, futures commission merchants, and foreign brokers (collectively called reporting firms) file daily reports with the Commission. Those reports show the futures positions of traders that hold positions at or above specific reporting levels set by CFTC regulations. When an individual reportable trader is identified to the Commission, the trader is classified either as «commercial» or «non-commercial».
What is Market-Making? (Definition by Tom Leksey)
Market-making (CME Group) is a centralized automated trading system of placing orders from market participants, which has a common pool of Commercial and Non-commercial accounts, which provides liquidity in the futures market, simultaneously opening new positions (buy/sell) and closing already accumulated positions, so that the shares of profit are distributed between each participant in accordance with the established proportions.
According to the latest definition, market maker means all united participants of market-making