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Ticking the box: tick size reduction for futures calendar spreads for EURO STOXX/STOXX Europe 600-Banks Futures

Release date: 15 Jul 2019 | Eurex Exchange, Eurex Clearing, Eurex Group

Ticking the box: tick size reduction for futures calendar spreads for EURO STOXX/STOXX Europe 600-Banks Futures

On 22 July 2019 Eurex will reduce the tick size for standardised futures strategies (futures calendar spreads) for the EURO STOXX®/STOXX® Europe 600-Banks Futures (FESB/FSTB). We spoke to Zubin Ramdarshan, head of Equity & Index Product Design at Eurex, about the planned change.

Randolf Roth, Member of Eurex Frankfurt Executive Board, responsible for market designZoom

Zubin Ramdarshan, Head of Equity & Index Product
Design, Eurex

Why is the tick size being changed – what is the advantage?

This tick reduction in the roll books makes things easier for passive long or short position holders who roll four times a year to get the full 12-month exposure to the underlying instruments. We want to create a friendlier environment for passive open interest holders, to lower their costs, which frees up capital and reduces slippage. The change also removes the incentive to trade in blocks outside of the market and increases volumes through the order book. Order book trading is open and transparent, in other words, exactly what an exchange stands for. Overall, it reduces costs for participants and increases the use of Eurex contracts, a win-win for all.

How do we go about changing tick sizes?

First, I would like to point out that we do not take such a measure lightly. We do a lot of consultation with clients in advance and perform detailed analysis of contract data before deciding on any changes.

The first time we did a tick change was in August 2017 with the STOXX® Europe 600 futures contract, a heavily traded product. It was preceded by intensive client communication, not just with our working committee for our largest customers but also bilateral conversations with numerous clients. We used data analysis, especially of block trades, to establish what the effective tick size was members were trying to emulate, which we then validated with clients. Liquidity providers are also key, and we made sure we had these on board for the tick size reduction. After the change we then had an evaluation period encompassing six roll periods to confirm that our adjustment was improving the liquidity picture. Only then, after this “test case”, did we look at other heavily traded products and used the same procedure for the contract change to our banks futures FESB and FSTB.

Are there any member concerns?

No, not really. We know that any changes to contract specification, indeed to market structure overall, means changes for members and we are sensitive to the fact that this could come with a cost. So, there must be a concrete benefit for clients, a boost to liquidity and an improvement to the order book.

We are only changing the calendar roll and not the outright contracts – this would have a much bigger impact and clients would be far more sensitive. A consequence is that we have to decouple the outright order books and switch off synthetic matching, our liquidity providers are then able to step-in to provide calendar roll quotes.

Can we expect tick size adjustments in other products?

After the change we will again analyse the next few rolls, present this to and validate with clients and sometime in 2020 we will have the results. If this is positive and grows liquidity, changes could be expanded to other popular contracts, but it is too early to be more specific.

The change in more detail
  • The tick in futures calendar spreads of the products FESB and FSTB will be changed from 0.1 to 0.02.
  • Accordingly, the value that represents a tick will be reduced from EUR 5 to EUR 1 and the number of decimal places will increase from one to two.
  • In the outright contracts (simple instruments), the minimum price change will remain unchanged at 0.1.
  • At the same time, with the change of the calendar spread tick, the outright and calendar spread orderbooks will be decoupled.
  • The synthetic matching in the outright orderbook with implied prices in the calendar spread book will no longer be supported by the trading system.
  • This means that the combinations of best price orders and quotes stored in different order books (“synthetic path”) and the price determined from such a combination of order book pages (“synthetic price”) as well as path priorities for EURO STOXX®/STOXX® Europe 600-Banks futures (FESB/FSTB) will no longer be supported.
  • In addition, for the entry of off-book-trades, the minimum block trade size for the EURO STOXX®-Banks Futures (FESB) will be increased from 250 to 500 contracts.

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