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What Is A "Velocity Logic" Event?

Tyler Durden's picture




 

Just before the start of the first POMO of the new year, gold was slammed lower by 2.1% on more than 8000 contracts in what the CME subsequently said was not an erroneous trade. Humor aside, how the CME justified the immediately following 10 second halt, was trough the invocation of a "velocity logic" event, not to be confused with the familiar "stop logic" circuit breaker which we have profiled in the past. Which obvioisly brings up the question: what is a velocity logic event.

Here, straight from the exchange's mouth, is the explanation:

Velocity Logic is designed to detect market movement of a predefined number of points either up or down within a predefined time. Velocity Logic introduces a momentary suspension in matching by transitioning the futures instrument(s) and related options into the Reserved/Pause State.

 

When a lead month futures instrument is placed in the Reserved State, the following actions occur in the corresponding options markets:

    Options auto-reserve functionality automatically pauses matching in the associated options and options strategies markets.
    All resting mass quotes are canceled when the auto-reserve functionality is initiated.

 

This Reserved State is maintained for a few seconds after the futures instrument has resumed trading. During the reserved period, customers can submit, modify and cancel orders. Mass quotes are rejected.

 

Allowing the user community this momentary opportunity to enter, modify, or cancel orders in this situation provides the ability to re-establish the proper market prices. The market data Security Status (tag 35-MsgType=f) message is used to communicate the instrument status during the Velocity Logic event.

And some more:

The following examples describe the Velocity Logic event and the use of the Security Status message.

State

Description

Market Remains Open

An aggressing order that requires particular market scenarios (e.g., Fill and Kill, Minimum Quantity, Fill or Kill) that would trigger Velocity Logic will be rejected via an Execution Report-Reject message (tag 35-MsgType=8, tag 39-OrdStatus=8), with tag 58-Text=Order price submitted/derived violates Velocity Logic Threshold. The market will remain open.

Market Is Reserved

If the execution price has moved the market up or down outside a predefined points value within a predefined time period, the Velocity Logic functionality is triggered and the instrument is placed in reserved state for a predetermined amount of time. A FIX/FAST Security Status (tag 35-MsgType=f) message is generated to notify the market of this state. If the reserved market is the front month lead future, the underlying options will also be halted and all products in the same product group are placed in Pre-Open State. CME Globex products with lead month futures instruments are outlined in the GCC Product Reference Sheet.

Icon

When the market is in a reserved state, any external event, such as a market close or manual market intervention, will cause the market to transition from the reserved state and proceed with processing of the external event.

Market Reserved Activities

While the market is in a reserved state:

  • A timer is activated that determines the length of time the market will be in reserved state. Time may vary.
  • A counter is activated that counts the number of times the Indicative Opening Price (IOP) verification will be performed.
  • An expanded price range is determined for verification of the Indicative Opening Price value.
  • When time has elapsed, verification is performed on the current Indicative Opening Price. If the Indicative Opening Price is inside the new expanded no-review range, the market reopens. The Indicative Opening Price is communicated via the Indicative Opening Price data block (tag 35-MsgType=X, tag 269-MDEntryType=4, tag 286-NoMDEntries=5).

Market Reopens

The FIX/FAST Security Status (tag 35-MsgType=f) message is generated.

If the Indicative Opening Price is outside the new expanded range, the instrument remains in the reserved state for another time interval and the Indicative Opening Price verification is performed again. This process continues until either the market is adjusted within the Indicative Opening Price range or the predefined maximum number of iterations has been performed.

While the options market is in the Pause state, clients can cancel resting orders. No other actions are allowed. During the Pause state CME Globex cancels all options quotes. Once the futures Velocity Logic event has been resolved, the options market transitions from 'Pause' to 'Open' with no indicative opening price; price discovery occurs via customer quote submission.

* * *

We suggest you familiarize yourself with the above: we have a distinct feeling both Stop and Velocity Logic events will become far more frequent in the Fed's balance sheet renormalization days ahead.

 

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Mon, 01/06/2014 - 12:24 | 4304473 Debtonation
Debtonation's picture

Then where were all the velocity logic buy events when gold got slammed lower over the past 2 years CME?

Mon, 01/06/2014 - 13:32 | 4304714 smlbizman
smlbizman's picture

to summarize...

bohica baby, 2014 the year of constant bohica....buy the fucking bohica....

Mon, 01/06/2014 - 14:56 | 4305046 Clint Liquor
Clint Liquor's picture

How and why do you 'fat finger' Gold and Silver at the exact same millisecond? We all know Silver is just an 'Industrial Metal' with zero monetary functionality. So, why bother with Silver?

Mon, 01/06/2014 - 15:01 | 4305063 disabledvet
disabledvet's picture

because selling anything is against the rules now. the "market" is simple: the direction is up, the timing is now. Everything else is an error in the system. the computer only has two buttons...the "lever up" button and "the keeping buying moar" spaced out bar.

Mon, 01/06/2014 - 22:30 | 4306508 StychoKiller
StychoKiller's picture

Let's ask the CFTC...

Mon, 01/06/2014 - 14:13 | 4304876 SAT 800
SAT 800's picture

Apparently so. The part I like is it's a type F message. I think I can understand that.

Mon, 01/06/2014 - 14:58 | 4305060 malikai
malikai's picture

FIX is one of the fatter and uglier protocols I've had to work with.

Mon, 01/06/2014 - 17:10 | 4305499 BrianZeroHedge
BrianZeroHedge's picture

What's wrong with it? I may have to switch to it later this year, so I'd want to pad my changeover timetables accordingly.

Mon, 01/06/2014 - 20:01 | 4306013 malikai
malikai's picture

It's a pretty good example of what you get from design by committe - too many problems solved by a single tool. Just take a look at the message types and response codes to see what you're getting yourself into.

I have to say, for my gripes, it does get the job done and it is fast if you go binary and use a good parser. Just make sure you understand your domain well and try to avoid any of the fatware platforms out there (check out quickfix if you haven't already).

But beware, it's asynchronous, so you'll have to handle state yourself. You'll have to get used to that if you're not already.

Mon, 01/06/2014 - 22:34 | 4306525 BrianZeroHedge
BrianZeroHedge's picture

Thank you for your comments! This is very helpful.

Mon, 01/06/2014 - 14:19 | 4304922 Stuck on Zero
Stuck on Zero's picture

The CME thinks they were all "Lacka-Logic" events.

 

Mon, 01/06/2014 - 12:28 | 4304483 Rainman
Rainman's picture

Renormalization can only occur once the Fed is declared extinct for good and forever.

Mon, 01/06/2014 - 12:56 | 4304555 Ghordius
Ghordius's picture

I beg to differ. the FED might be culpable of many things, but the increasing role of bots - and rules tailored for bots - on the exchanges is one thing that has little to do directly with them

after all, exchanges are a private affair. you can buy a "seat", trade and - depending from the exchange - vote on how the exchange has to be run

I've worked once many years ago for a summer in an exchange where it was still all based on "shouting" - just watch the famous movie "Trading Places" to get the idea (not that I think you need this example with your 4 years old ZH account, but I am verbose and I still think that simple explanations in the comments are what makes ZH rock - we can't know all, each of us)

the question should be more: at what point will company treasuries shun an exchange in favour of one where everything is more "kosher"? we are starting to see some action of this kind through Russian companies listing their stocks at Hong Kong, for example

of course - and there I think it's the kerner of truth you are hinting to - the FED is lifting the (USD) tide, and so making US exchanges "interesting". yet a simple "End the Fed" is imho too simplistic

Mon, 01/06/2014 - 13:23 | 4304681 bozzy
bozzy's picture

Fork and dangle the lot. End the Fed - charlatans that its talking heads are - Bernanke specifically.

Oh and just to add to your knowledge a little - "shouting" is even now still referred to as "open outcry"

Mon, 01/06/2014 - 15:05 | 4305071 malikai
malikai's picture

The FED's role in providing liquidity via banks and other parties cannot be understated.

Mon, 01/06/2014 - 15:05 | 4305086 disabledvet
disabledvet's picture

this is not a bidless market but a CASHLESS market...where every new statistical theory that can be created is created in order to justified "estimated pricing." anything outside the margin of error...or even the approximation of the approximation of margin of error...is declare null and void. Massive positions get built in single equity's...all with one dollar on the table and levered to a trillion. the regulators tell the DC folks to kiss off...and eventually some really big goes bankrupt...and I ain't talking General Motors. Today it was the Swiss National Bank. "A bank who's debt exceeds their country's GDP by 10,000 times." so, sure..."everything is just fine in Europe. We shove 50 trillion in securitized debt into Switzerland and called it all good."

Mon, 01/06/2014 - 12:28 | 4304488 rehypothecator
rehypothecator's picture

Regulators could damplen HFT by imposing a fee for those quotes, more than the tenth quote on unfilled orders, in the same millisecond, from the same entity.  If they actually opposed such shenanigans.  

Mon, 01/06/2014 - 15:07 | 4305094 disabledvet
disabledvet's picture

this has been proposed....0000001 cent should be sufficient to eliminate the deficit in one year in the USA alone.

Mon, 01/06/2014 - 12:32 | 4304498 williambanzai7
williambanzai7's picture

Isn't this a form of church sanctioned birth control?

Try shifting into that reserved/paused state. Not too easy...

Mon, 01/06/2014 - 12:52 | 4304582 Ignatius
Ignatius's picture

The 'withdrawal method' works -- believe me -- though it does require a certain discipline.

Mon, 01/06/2014 - 13:26 | 4304690 bozzy
bozzy's picture

You saying 10 seconds is not long enough to spin on your heel ? No worries if you are an algo sitting 1 metre from the exchange server.... (Sarc)

The only option for an individual who has not been stopped out or is unsure of whether he has or has not been stopped out, is to panic.

 

Fork and Dangle the lot.

Mon, 01/06/2014 - 12:34 | 4304499 ebworthen
ebworthen's picture

You know, they wouldn't need all this high-tech mumbo-jumbo if they only allowed trades to occur once per minute, on paper.

Of course that would be in a world where tangibles backed the currency and the rule-of-law was alive.

20% down on a loan held for life by the bank and never secularized or derivativized.

People had to think before talking.

7% earned on savings.

You know, sanity.

Mon, 01/06/2014 - 12:37 | 4304509 williambanzai7
williambanzai7's picture

Wait until we see Reggie's instantaneous bitcoin clearing. Try reversing one of those.

Mon, 01/06/2014 - 12:39 | 4304536 ebworthen
ebworthen's picture

lol...you made me laugh WB7...thanks.

And I meant "securitized" not "secularized" but...

Mon, 01/06/2014 - 15:18 | 4305117 disabledvet
disabledvet's picture

we've gone full on Terrence and Phillip now.

Mon, 01/06/2014 - 12:42 | 4304533 Possible Impact
Possible Impact's picture

An acute shortage of mentum!

No mo' mentum.

Mon, 01/06/2014 - 12:43 | 4304539 NIHILIST CIPHER
NIHILIST CIPHER's picture

Velocity Logic:     When Ben sits on the throne pondering how to keep his neck out of a noose and drops a deuce at high speed.  

Mon, 01/06/2014 - 13:32 | 4304699 bozzy
bozzy's picture

Wont be like that - one of your disaffected Vets will take his melon off at half a mile sometime with a .762 or similar

Mon, 01/06/2014 - 12:43 | 4304549 firstdivision
firstdivision's picture

One cannot use the term logic, when talking about any financial market. 

Mon, 01/06/2014 - 12:46 | 4304559 Quinvarius
Quinvarius's picture

The ESF got buttfkd.   

Mon, 01/06/2014 - 12:58 | 4304590 Bangin7GramRocks
Bangin7GramRocks's picture

What an incredible waste of brainpower! The Fed controls the markets and if you aren't one of the chosen insiders than you are just guessing.
TOTALLY GAY!

Mon, 01/06/2014 - 13:12 | 4304645 Missiondweller
Missiondweller's picture

Unclear to me: Was this trigerred in the spike UP or spike DOWN in gold???

Mon, 01/06/2014 - 13:17 | 4304659 Quinvarius
Quinvarius's picture

They know it has to go higher or there will be defaults.  They just don't want anyone to profit off of their stupidity on the way back up.  Trader stops must be ticked off.

Mon, 01/06/2014 - 13:30 | 4304708 bozzy
bozzy's picture

And this affeccts PHYS HOW???

 

Fork and Dangle the lot.

Mon, 01/06/2014 - 15:26 | 4305135 disabledvet
disabledvet's picture

because of the leverage. the overwhelming directional bet is long...if the price drops so much as a buck the phone call starts ringing and the entire exchange has to hit the "fat finger" button. there's nothing wrong with the metal...if anything its more "valuable" actually. but when you start drilling down on how little cash there is in the market then over that asset with the denominator of "really big leverage" (since all cash is worthless...let alone return on savings) then you start getting 90 percent drops "out of the blue" in things that are far larger than gold. (Say...Berkshire Hathaway going down 90% in a day.) and that's what got bailed...is out...or into to? believe me the threats are flying fast an furious right now. and of course "we're sitting on trillions in free cash flow" so believe it or not it need not be this way at all. "they just never learned how to share" that's all.

Mon, 01/06/2014 - 13:38 | 4304725 Laughing Stock
Laughing Stock's picture

 

Q: What Is A "Velocity Logic" Event?

 

A: When Goldman's BallSack get's caught offsides and needs to be bailed out of the trade
Mon, 01/06/2014 - 13:52 | 4304775 ejmoosa
ejmoosa's picture

So now you are no longer able to buy or sell, unless your actions are aprroved by TPTB.

 

"Thank you sir.  May I have another?"

Mon, 01/06/2014 - 15:41 | 4305181 disabledvet
disabledvet's picture

cancelling trades on this scale is more like "using the Force"...it never happened and supposedly you just "move on down the road." how one can cancel trades that move in an upward direction is simply beyond me. that is a logical impossibility and to claim "you can't make money on the long side either" says to me the end is near here. In other words XOM dropping 90% in 15 minutes is one thing...but treasuries suddenly surging in value...and then those trades getting cancelled...says to me the only market that is functioning right now is the cash market "and it's drying up fast." those that HAVE liquidity...simply paying interest or collecting dividends on discounted cash flow, pumping oil or natural gas...are in the driver seat. this is actual "money" and more important is "bankable" in the sense that if your cost structure is good you can get some huge loans...in this iteration by going around the banks entirely and going direct to Wall Street itself. (Fed Ex is doing that today actually.) so sure...the equity may in fact be worthless...but after thirty years or so or simply holding it while it goes up in price you've collected your principal and then some just in the form of dividend payments over that time frame. this is why debt and "government size" management at the State level is so important. you cannot "go to Wall Street" to pay for Federal Programs. that has to be done through recovery in the economy as a whole. QE worked incredibly well using that metric...which makes Taper all the more odd. If there is no "recovery" going...when you taper what exactly is Wall Street betting on again?

Mon, 01/06/2014 - 15:36 | 4305172 hooligan2009
hooligan2009's picture

the moral of the story is....dont use stop or limit orders on stocks that might move".....ummmmm..oh yeah

Mon, 01/06/2014 - 15:45 | 4305190 RaceToTheBottom
RaceToTheBottom's picture

Real markets are for whimps

Mon, 01/06/2014 - 16:03 | 4305273 withglee
withglee's picture

Just add a random delay to each order and be done with it.

Mon, 01/06/2014 - 16:52 | 4305432 jack stephan
jack stephan's picture

Sounds like skin failure or blinker fluid to me.

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