Typically, when you route a market order, you usually expect the entire order to fill right away. However, that may not be the case when routing a multi-lot (more than 1) futures order. Unlike equities, market orders on futures are subject to protection points, resulting in a Market Order with Protection. What does this mean and how can it affect your trading?
Each time a multi-lot market order in an outright futures contract or option on future is sent, the exchange, which in this case is the CME (may also apply to other futures exchanges), automatically places a protection range to protect the order from any extreme price movement. As a result, when you route a multi-lot market order, it is filled within a pre-defined range set by the exchange and may only partially execute if the underlying price tests the protection range.
A protection range sets at the time a multi-lot market order routes and protection points establish. That means when you place a buy order; a protection point sets above the current ask. Conversely, for a sell order, a protection point sets below the best bid price.
Consequently, this means a market order that is subject to protection points may only partially fill while the remaining order can turn into a limit order set at the protection point. The order remains in the order book, but may be left unfilled. However, it is still possible to cancel the remaining order and resubmit a new order. Just be aware that a new order will be subject to this treatment again.
Generally speaking, market orders that are subject to Market Orders with Protection is rare, but it can happen. It is something to keep aware of, especially when employing market orders in a fast-moving market.
To learn more about CME's Market Order with Protection, please click here.