While most traders consistently trade on-screen, some utilize the voice-brokered block market for trades they feel cannot be filled on-screen.  Certain types of trades may benefit from the expertise of voice-brokers, however, a common misperception among traders is that any trade of significant size must be filled through the block market.  This is no longer true due to improvements in liquidity and greater participation.

The average trade size cleared as a block in Henry Hub options at CME Group is slightly fewer than 150 lots, a number that surprises many, as the assumption is much higher.  Trades of this size can more efficiently be executed on CME Direct. 

The process of finding liquidity on-screen with a Request for Quote (RFQ) via CME Direct or in the block market via broker are similar:

While the outcomes may be similar, finding liquidity via RFQ and executing on CME Direct is more efficient and has many additional benefits:

• Completely anonymous, no obligation Request for Quote
• Instantaneous tradeable liquidity
• Central Limit Order Book execution with no leg risk
• Full transparency of prices and market depth
• Instant fills sent directly to your position management system, eliminating reporting errors
• Execution and intermediation cost savings

Many traders already choose the CME Direct screen first when seeking liquidity, and some of those traders improve their trading efficiencies by transacting both small and large size strategies on-screen.

We have validated the utilization of CME Direct for large-size strategies in Henry Hub options.  Compiled data from the top single-day volume screen-traded strategies in 2022 reflects this reality.  Our analysis highlights call spreads and put spreads, also called verticals, which are the most traded strategies.  All lot sizes reference the market standard NYMEX 10,000 MMBtu/month contract.  Lot quantities reference number of spreads traded not the total number of legs.

• Of the top 100 volume verticals: all 100 were filled on 1,000 or more lots
• Of the top 50 volume verticals: more than half were filled on 2,500 or more lots
• Of the top 10 volume verticals: six were filled on at least 5,000 lots, with two over 10,000 lots

Average trade sizes and median trade sizes also show how traders are getting large size done on-screen:

The average trade size of the top 100 vertical strategies is nearly 2,500 lots demonstrating that traders who need 100 lots, 250 lots, 500 lots, or even 1,000 lots can comfortably get trades done on CME Direct.

One of the primary concerns traders have expressed about executing large trades on CME Direct is slippage – having to pay through multiple price levels to get their order filled. 

To show how large sizes can get done with minimal slippage, we looked at several volume-weighted metrics of these vertical strategies

• Highest % of volume executed at one price: of all traded volume per strategy, the highest share of total volume executed at a single price
• Highest % of transactions executed at one price: of all total transactions per strategy, the highest share of fills at a single price
• Standard deviation from the trade price in ticks (SD): of all traded volume per strategy, how far each fill price is from the average price

*ALL DATA POINTS ARE VOLUME-WEIGHTED

Most volume in each bucket of strategies was executed at one price, and most of the total transactions were done at one price.  When looking at the volume-weighted standard deviation from the trade price, the data show that the total fills are less than a single tick away (one tick = 0.001).

Another key aspect to understand about large-size strategies in CME Group’s Henry Hub options is how executions occur in the order book.  When a large-size strategy is executed, this is the typical workflow:

Nearly 84% of transactions in CME Group’s Henry Hub options strategies order book occur in this manner, which is defined as an Aggressive Order vs. Resting Order. The customer placed the Resting Order, while the market-maker filled the customer with an Aggressive Order.

Most of the remaining transactions occur as an Aggressive Order vs. Resting Quote.  In this match event, the customer likes the Resting Quotes the market-makers provided, then sends in an Aggressive Order either hitting the resting bid quote or lifting the resting offer quote.  This accounts for about 12% of transactions.

• Aggressive order: Order intended to hit/lift an existing order or quote in the book
• Resting order: Limit order placed at a price where no opposing orders or quotes exist
• Resting quote: Market-maker quote streamed into the order book at a specific price
• Aggressive quote: Market-maker moves an existing streamed quote to a new price level