Date:	June  29, 2006
Recipients:	Members and Independent Software Vendors
Authorized by:	Jeffrey S. Hersh
Title:	New Functionality Supported by e-cbot:Simple Inter-Commodity Spreads (SICS)
Action Date:	n/a
Document Recommended for:	Developers, Key Contacts, Traders
Related Bulletins	Bulletin #32/2006
Attachment:	1) Price Format Spreadsheet
SUMMARY:

In anticipation of the August 1, 2006 launch of agricultural side-by-side futures, the CBOT plans to introduce Simple Inter-Commodity Spreads (SICS).  SICS will enable the e-cbot trading host to support a separate contract that does not list explicit months, but instead allows two separate contracts to be traded against each other without legging risk within a central order book.  The SICS products will trade with a volume ratio of 1:1 only.  Conformance testing is required for all trading applications written for this functionality.  The reserved conformance period for SICS is July 10 through July 28 in order to meet the timeframe for the August 1, 2006 launch.

The two SICS products planned to be available on August 1, 2006 are:

                        ZKS     South American Soybeans vs North American Soybeans

                        ZCW   CBOT Corn vs CBOT Wheat

Development and Conformance Environment

The development test and conformance will take place in Development Environment 58.  The IP Addresses to Environment 58 are:

                        167.204.77.32                         167.204.77.35

                        167.204.77.33                         167.204.77.36

                        167.204.77.34                         167.204.77.37

ITMs that are currently used to access Simulation Environment 77 can be used in Development Environment 58. 

Please schedule conformance directly with the AEMS CTSG Group at ctsg@liffe.com  or 011 44 20 7379 2986.

Simple Inter-Commodity Spreads (SICS) Functional Description

The e-cbot trading host supports a separate contract that does not list explicit months, but instead allows two separate contracts to be traded against each other without legging risk within a central order book.

Each trader needs to subscribe to the contract. There are two SICS products available:

                        ZKS     South American Soybeans vs North American Soybeans

                        ZCW   CBOT Corn vs CBOT Wheat

The SICS does not generate any implied out prices to the underlying legs and additionally the underlying legs do not publish implied in prices into the SICS. A single order ID is allocated to a SICS spread order, as with other strategies.

The method of creating a SICS spread is slightly different from creating a normal strategy spread in that the SICS contract code and the contract code for each leg must be supplied (i.e. data for 3 legs to create a 2 leg strategy).

The following headings detail the five key design areas for the product.

Creation of the Strategy Market

Before it is possible to submit orders, a market needs to be created on the host to represent a simple inter-commodity strategy. The CreateMarket transaction enforces the rules appropriate to the type of strategy being created. In the case of a SICS spread, the creation is only allowed so that it is quoted in terms of buying the SOUTH AMERICAN SOYBEANS to sell the NORTH AMERICAN SOYBEANS with the same expiry month. For example, a successfully created market would be the SOUTH AMERICAN SOYBEANS Nov 06 versus the NORTH AMERICAN SOYBEANS Nov 06.

The first leg of the strategy must always be quoted as the SOUTH AMERICAN SOYBEANS and the second leg as the NORTH AMERICAN SOYBEANS. Prices are quoted in terms of buying SOUTH AMERICAN SOYBEANS and selling NORTH AMERICAN SOYBEANS in a volume ratio 1:1. If this is not entered in the correct format, the Trading Host will reject the CreateMarket request. Additionally, the months selected in each contract leg need to match otherwise the CreateMarket request will fail.

If one of the underlying contracts introduces a new month and the same month is not available in the other contract then the creation of a spread market is rejected.

The following table illustrates the difference between the Spread contract and the outright contracts –

Contract	SOUTH AMERICAN SOYBEANS Future	NORTH AMERICAN SOYBEANS Future	SICS Future
Contract Code	ZK	ZS	ZKS
Months	March, June…	March, June…	Not Applicable
Strategies available	All futures strategies e.g. B – Butterfly, M - Strip	All futures strategies e.g. B – Butterfly, M - Strip	The only strategy allowed will be the inter-commodity spread strategy that is defined as: Leg 1 - SOUTH AMERICAN SOYBEANS (buy) Leg 2 – NORTH AMERICAN SOYBEANS (sell)
Defined Markets	Any combination	Any combination	For example, NOV 06/NOV 06 DEC 06/no month listed strategy creation will be rejected by the Trading Host.

 

Strategy Expiry Dates & Times

On the expiry of one of the months in the individual SOUTH AMERICAN SOYBEANS or NORTH AMERICAN SOYBEANS contracts, any SICS spread strategies with the expired month will automatically be suspended and any orders pulled. Any subsequently entered orders will be rejected by the Trading Host.

The contract can either be closed manually, or placed into pre-open or open independently of the parent contracts. In addition, price limits can be enabled/disabled or the contract suspended.

The dates and times of expiry of the underlying legs of an inter-commodity strategy may not be the same. To deal with this, the expiry date and time of an inter-commodity strategy are the youngest expiry date and time of any of its underlying legs. This is set when the strategy market is created.

If a market is created and a GTC order is submitted then the order and market will be returned at the start of each day until one of the legs has expired.

When one leg expires before the other, a trader will no longer be able to create and trade that market and therefore the GTC will be deleted.

Trading

The trading hours available for this contract depend upon the underlying legs in the SOUTH AMERICAN SOYBEANS and NORTH AMERICAN SOYBEANS. Currently the contracts have the different trading hours.  The spread contract will only be available from the latest opening time of one contract until the earliest closing of the other contract.

The trading hours are automatically calculated by the e-cbot trading host and are not displayed on the Generic Trading Calendar on the Observer GUI.

All order types including Good in Session (GIS) are valid for this contract.

Reporting Into Underlying Legs

The reporting of trade data into the underlying legs from the spread contract when a trade occurs in an inter-commodity strategy is restricted. The only data that is updated in the underlying leg markets is the total traded volume in that market. The change in total traded volume is published in a market update message for each underlying market when a trade in the strategy occurs. However, the spread contract maintains its own last trade and volume information for each of its markets and these are also immediately updated following a trade.

The trade messages for all strategy trades will be split into individual legs with the strategy code identifiers.

  Market Mode Changes

As the SICS contract contains only strategy markets (no contract months), mode changes are reported in a similar way to other strategy markets. When there is a change of status of an underlying market (SOUTH AMERICAN SOYBEANS or NORTH AMERICAN SOYBEANS), the e-cbot trading host sends market mode messages defining the current state of the SICS. For instance, as the first underlying contract moves from pre-open to open, users will possibly be notified that the SICS is still in pre-open. When the second underlying contract opens, the system will notify users that the SICS contract is now open. When the SOUTH AMERICAN SOYBEANS and NORTH AMERICAN SOYBEANS contracts have the same times configured for a status change, the market mode messages have no guaranteed sequence as the host processes them independently.

It is important to note that e-cbot TRADING HOST “optimizes” market mode messages when notifying users of the status of markets. If all markets within a contract have the same status then the Market Mode message will be sent at Commodity (contract) level. Otherwise where months or markets have mixed states, then Market Mode messages will be sent at Contract Month or Market level. Therefore, if there is only one SICS market defined, and that strategy market closes (perhaps due to expiry of an underlying leg), then a Commodity level close message will be sent out.

If you have any questions about this Bulletin, please contact Don Segreti at 312-341-5908 or dsegreti@cbot.com.