Risk Limit Implementation Details

While risk management functionality is designed for and generally used for protection with regards to posted liquidity, the same risk configurations can impact the activity of removed and/or routed flow.

All Risk Root level risk limits are checked in an atomic way inside each matching engine. As soon as a limit is breached, all resting orders and quotes in all series relating to that Risk Root+EFID will be cancelled immediately.

EFID and EFID Group level risk limits are evaluated in a separate process outside of the Matching Engine. This outside process detects when risk should be tripped and sends a message to all matching engines when a trip occurs. Additional executions may occur while messages are in-transit.

Risk Controls do not affect an in-process series opening, including a SOQ series opening. If a risk trip occurs in the middle of matching contracts within the context of a single series opening, the single series opening match will continue until the series is fully opened. This is true for appointed Market Maker quotes and SLOO orders during the SOQ Opening process, but does not hold true for orders and non-appointed Market Maker quotes. Risk will not be tripped for orders and non-appointed Market Maker quotes until all SOQ constituent series are open. If risk is tripped during the SOQ opening, non-appointed market maker quotes and non-SLOO orders in other non-opened series will be cancelled upon completion of their opening auctions.

The Risk Violation Scenarios table describes some of the different scenarios that may be encountered and should help customers to understand what to expect in the context of risk violations.

Table 1. Risk Violation Scenarios

Execution Type: Matched

Execution Type: Routed

Rate Based & Absolute Count

If a customer specifies a limit of 10 trades, the 11^th matched trade will not occur within the specified time interval.

If there are multiple outstanding orders that have been routed away ALL may execute. While Cboe will apply routed executions to your profile, your theoretical limit is equal to the number of matched executions plus open away orders.
Example: Suppose your limit is 10 executions per second and you have 8 that have occurred plus 3 open orders that have been routed to an away exchange. If all three execute at the away exchanges, your risk limit will have been reached at 11 executions instead of 10.

Rate Based & Absolute Volume

Incoming orders/quotes may execute through a resting order/quote’s risk limit if the remaining limit is less than the total quantity of an order.
Example: Suppose your limit is 10 contracts while displaying a single quote for 15 contracts on book. An incoming order for 12 contracts executes with 12 of your 15 contracts and the remaining 3 contracts are cancelled back.

Similar to the limits for counts, the theoretical limit is equal to the current execution volume plus open away aggregate order/quote size.

Rate Based & Absolute Notional

Incoming orders/quotes may execute through your resting order/quote’s risk limit if the remaining limit is less than the total notional value of the order.
Example: Suppose your limit is $1,000 per minute and you have currently executed $980. You have a single quote on the book for 3 contracts at $7. If this quote is hit, Cboe will execute all 3 contracts for a total notional executed of $1,001.

Routed executions will always be open to the potential for exceeding your limit by orders that have been routed to an away exchange.
Example: Suppose your limit is $1,000 and you have executed $950. Furthermore assume there is $100 in notional open orders that have been routed to an away exchange. You may reach $1,050 before your limit is triggered.

Rate Based & Absolute Percentage of Quote

Incoming orders/quotes may execute through your resting order/quote’s risk limit if the remaining limit percentage is less than 100%.
Example: Suppose your Percentage Of Quote limit is 200% per second. Four quotes are resting in a given Risk Root (XYZ) with the following quote sizes and executions. Executions are ordered by time along with the aggregated Percentage Of Quote after each execution:
Sell 80 XYZ1 - Trades with Quote 1 (POQ = 80%)
Buy 50 XYZ1 - Trades with Quote 2 (POQ = 130%)
Sell 60 XYZ2 - Trades with Quote 3 (POQ = 190%)
Buy 100 XYZ2 - Trades with Quote 4 (POQ = 290%)


Series	Bid Size	Offer Size	Trade Size	POQ
Series XYZ1
Order 1	100		80	80%
Order 2		100	50	50%
Series XYZ2
Order 1	100		60	60%
Order 2		100	100	100%
				290%

The Percentage of Quote is computed as:
80 + 50% + 60% + 100% = 290%
All four trades in the given Risk Root (XYZ) will execute, triggering risk, followed by a cancellation of all open orders/quotes in the given Risk Root and rejecting new orders/quotes within the Risk Root.
If there are any order modifications to quantity (up or down) or price, percentage of quote calculations having resulted in executions on the original order/quote will be retained and the modified order/quote will be treated as a new order/quote.
Example: An Options Exchange customer specifies a Percentage of Quote limit of 200% with two (2) resting quotes in the given Risk Root (XYZ) for 100 contracts, followed by a modify to Quote 1 to refresh quote size following an execution. Executions are ordered by time and include the aggregated Percentage Of Quote after each execution:
Sell 80 XYZ1 - Trades with Quote 1 (POQ = 80%)
Buy 50 XYZ1 - Trades with Quote 2 (POQ = 130%)
Modify Quote 1 - Increase size back to 100 (POQ = 130%)
Sell 100 XYZ1 - Trades with Quote 1B (POQ = 230%)


Series XYZ1	Bid Size	Offer Size	Trade Size	POQ
Order 1	100		80	80%
Order 2		100	50	50%
Order 1B	100		100	100%
				230%

The Percentage of Quote is computed as:
80% + 50% + 100% = 230%

Routed executions will always be open to the potential for exceeding your limit by orders that have been routed to an away exchange.
Example: Suppose your limit is 200% and you have executed 190% of your percentage of quote. Furthermore assume there is an order for 50 contracts that has been routed to an away exchange. You may exceed your 200% limit if more than 5 out of 50 (10%) contracts are executed at the away exchange.

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Risk Limit Implementation Details