Strategy Managers: Get ready for position size limits

Hi, D_Financial:

The CME has taken the position that prices are not allowed to change too much on their futures exchanges. In fact, they have fined Collective2 a lot of money (a lot for us) for allowing too many trades to be placed on their exchanges, if those trades cause prices to move too much.

We’ve been working with the CME to try to decrease the chance that mighty Collective2 is able to affect prices on the CME too much. Thus the position size limits we’ve recently imposed on Strategy Managers.

Now, as to where these position size limits come from:

Every strategy on Collective2 has different position size limits for different futures contracts. (Some strategies have no effective limits.) The limits are based on the aggregate size of trades being placed by subscribers following your strategies (not solely the number of subscribers, but also the amount of capital they’re deploying when following your strategy). The position limits also based on the trading volume and liquidity of each individual contract.

These limits will change day by day, as contract volumes change, and as you gain or lose subscribers. So I recommend you check your strategy’s individual position size limits every now and then.

In a sense, the fact that you find these position size limits unpleasant is actually a sign of your success. Congratulations! You are now operating a strategy at such a level that you could possibly attract the interest of the CME and its investigators.

Collective2’s imposing of size limits on your strategy is really just a way to keep you safe. The goal is to make sure that when you issue trade signals, your strategy does not move markets much.

Now, sure, it’s a bit weird that a number of futures contracts are effectively untradable for you (right now). I agree: that stinks. But it’s really an indictment of the market liquidity on the CME for some of these contracts. And it’s a reminder about the CME’s official policy about price movement being based on supply and demand (they’re against it).

We’re having an ongoing discussion with CME regulators about these restrictions, so it’s possible the trading size limits might be loosened as these discussions move forward.

Collective2’s goal is to be a responsible participant in the U.S. financial markets, and to cooperate with regulators. The truth is, what we’re doing here at Collective2 is to pioneer a new frontier in financial markets. Regulations can sometimes take a while to catch up with new technologies and business models. It’s my hope that, over time, Collective2 (and all the people that use Collective2) can reach a satisfactory understanding with the CME and regulators.

For now, we need to try to work within these restrictions to the best of our ability.

– Matthew

P.S. As I will reply to Mike in a separate post, these restrictions are not something that subscribers need to worry about. Size limits only directly affect strategy managers. In effect it becomes the strategy manager’s job to operate within size limits, not the subscriber’s job.