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Streamlining MOC trading with an on-exchange solution

Release date: 28 Feb 2018 | Eurex Exchange

Streamlining MOC trading with an on-exchange solution

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Eurex Market-on-Close Futures reached a new milestone on 14 February with 2,124 traded contracts. The trading screen features tight spreads in the FES1.

How using Eurex Market-on-Close (MOC) Futures can confine poor execution to the past and help minimize tracking error

Placing orders at the end of the trading day, to settle a trade as near as possible to the market’s closing price, is not an exact science. Getting the execution right can be tricky when there is a swell of buy and sell orders looking to do the same thing at the same time. Invariably it leads to inefficiencies and poor execution, and all the more so when the targeted closing price is for an equity index comprising many constituents.

For managers of index-tracking funds, which seek to mimic a stock market’s performance, the slippage seen on MOC orders is a big problem, as it contributes to tracking error. 

Other structured financial products that reference stock indexes – such as swaps and options – face similar challenges. And these are growing challenges, given the boom in passive or automated investment vehicles and in exchange-traded funds, which in turn can only continue boosting demand for MOC-type orders. 

However, Eurex Market-on-Close Futures can help change that. With our pioneering offering, initially focused on the Eurozone’s blue-chip EURO STOXX 50® Index, traders can confine poor execution to the past – and save on costs too.  

Launched in October 2017, Eurex Market-on-Close Futures were designed
to deliver multiple benefits to a market that has so far been dominated by OTC trading. The index futures facilitate MOC trading since it can be traded at the underlying cash market index close ahead of its actual publication. The contract represents the basis, defined as the difference between the current futures price and the current index cash price. Our first MOC Futures is based on EURO STOXX 50® Index Futures covering one of the most liquid index futures worldwide


How it’s done now

Since any money received by an index-tracking fund on any given day needs to be invested at the end of that day to ensure no cash drag, MOC traders currently rely on the over-the-counter market to get the job done. Before buying (or selling) the company shares that make up an index at the close, they first arrange a bespoke futures trade with a bank that best matches their requirements for that day. Specifically, they agree the ‘basis’ – the difference between the current equity index futures price and the current equity index value, which technically covers the costs of financing a position up to the futures date minus any dividend payments triggered in the interim. Adding the basis to the equity index’ closing cash price then gives traders a fair-value estimate of the MOC futures contract. 

In this way, traders gain a cushion; they get the desired exposure before actually having to buy and receive the shares they need to effectively track the underlying stock index. However, it is an imperfect solution – an inefficient and costly one that is prone to sub-optimal execution, since the broker still has to match the agreed theoretical futures price to actual futures trades once the day’s final equity index cash price is known. This is where mismatches occur, as the traded price often deviates from the calculated final futures price. 

That is largely because the minimum price change on EURO STOXX 50® Index Futures is 1.0 index point, while the EURO STOXX 50® Index’ official closing price is good to two decimal places. The broker may still be able to achieve the more granular final futures price on Eurex Exchange by splitting the order into several executions and averaging them out. But some slippage remains unavoidable, especially if the Block Trade Service cannot be accessed and orders have to be entered into the futures order book.  

Eurex MOC Futures – designed to deliver multiple benefits

Not so with Eurex MOC Futures, which, unlike EURO STOXX 50® Index Futures, focus solely on the basis. These benefit from a smaller tick size, which enables more forensic levels of trading. As a result, there is no need to split orders into separate trades to achieve the desired price, and less potential for tracking error. 

Pieter Entius, Head of Trading at market maker Flow Traders, is in no doubt about the benefits: “For market participants it will now be a far more easily accessible market, a far more efficient way to trade [MOC] Futures.” 

As well as making the process more efficient, using Eurex MOC Futures for basis trading will increase transparency and reduce risk – in keeping with the aims of the revised European Union’s Markets in Financial Instruments Directive (MiFID II). 

Migrating MOC basis trading away from OTC markets would help to minimize counterparty risk because trades on regulated derivative exchanges like Eurex are cleared centrally. 

Improved transparency, meanwhile, comes from the shift to centralized pricing via an open order book. With a minimum trade size of just one contract, all market participants have equal access to the Eurex MOC Futures order book. 

The rationale is compelling and Eurex MOC Futures based on the EURO STOXX 50® Index are just the start. Given the broad range of other equity index futures products in the Eurex portfolio – including futures based on the DAX®, Swiss SMI®, STOXX® 600, MSCI and STOXX® sector indexes – more will follow.


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