Self-match prevention (SMP)

How it works on CME Globex

CME introduced SMP on Globex in June 2013. According to CME's December 2014 guidance on Rule 534, the functionality is optional and, when employed, blocks the matching of buy and sell orders for commonly owned accounts that are submitted with the same executing firm ID and the same SMP ID in the order message. At the time of that notice, the matching engine canceled the resting order and processed the aggressing one; enhancements introduced in December 2014 and January 2015 let customers choose whether the resting or the aggressing order is canceled, and in FIFO-only markets, orders are canceled only if they would actually match. Current details, and the registration of SMP IDs, are handled through CME and the clearing firm.

The wash-trade rule behind it

Two orders from the same owner that trade with each other produce a wash result: a trade that changes nothing economically. CME Rule 534, Wash Trades Prohibited, bars placing or accepting buy and sell orders in the same product and expiration month, and for options the same strike, where a person knows or reasonably should know that the purpose is to avoid taking a bona fide market position exposed to market risk. CME's guidance on the rule describes a wash trade as requiring both a wash result, the purchase and sale of the same instrument at the same or a similar price for accounts with the same or common beneficial ownership, and the intent to achieve it. The Commodity Exchange Act also makes wash sales unlawful.

On the electronic platform, the same guidance says it is a violation to enter an order that you knew or reasonably should have known would trade against your own resting order. Unintentional and incidental matching generally is not, but self-matching on more than an incidental basis may be deemed a wash trade, and traders who frequently have orders on both sides are advised to use functionality that minimizes self-matches. SMP is that functionality at the exchange level.

A worked example

A trader runs two strategies in the same account. Strategy one has a sell limit for 3 contracts resting at 5,001.00, the best offer. Strategy two sends a buy for 3 at the market. Without SMP, the buy matches the trader's own offer: the tape prints 3 contracts, the account's net position is unchanged, and fees are paid on both sides. With SMP configured for both orders under one SMP ID, the match is blocked and one of the two orders is canceled, depending on the chosen mode.

Situations where it matters

• Several strategies or several traders working the same account or commonly owned accounts.
• A manual order resting while an automated strategy trades the same contract in the opposite direction.
• Hedging logic that places orders on both sides of the market around the same price.

In Senzoukria

Orders are routed through the broker account selected in the application, and the application does not expose an SMP ID or a self-match setting: whether SMP applies to an account is arranged with the broker or clearing firm. The practical safeguard inside the application is visibility. The working orders list shows every order resting on the selected account, including orders placed from other platforms, which is where an opposite-side order that could be matched by your own new order shows up before you send it.