Eurex will reduce the minimum price change for Euro-Bobl futures and options on Euro-Bobl futures as of June 8, reducing the costs incurred by market participants in hedging or rolling ove
Eurex will reduce the minimum price change for Euro-Bobl futures and options on Euro-Bobl futures as of June 8, reducing the costs incurred by market participants in hedging or rolling over positions by approximately 50 per cent.
Halving the tick size for Euro-Schatz futures three years ago resulted in an improvement to the market structure and has led to rising volumes. The two-year Euro-Schatz future is accepted as the benchmark in its maturity segment, and the most actively traded short-term bond futures contract worldwide.
With the introduction of half-tick pricing, the tick size for Euro-Bobl futures and options on Euro-Bobl futures will be reduced from 0.01 to 0.005 per cent, and the tick value from EUR10 to EUR5.
The change in tick size will take place on June 7, after close of trading at 10 pm CET. All unexecuted Euro-Bobl futures orders in the Eurex system will be deleted that evening, and will have to be re-entered if required on the morning of June 8.
The narrower bid/ask spread resulting from the reduced tick size holds advantages for both traders and institutional clients when establishing or hedging positions, since the bid/offer spread is the largest component of implied transaction costs. Reducing the tick size will halve the implied transaction costs incurred in a rollover trade.
At the same time, hedgers will be able to cover their risk exposure more efficiently. For example, when trading 1,000 Euro-Bobl futures, implied transaction costs amount to 0.53 basis points, of which 0.46bp is attributable to the bid/offer spread and 0.07bp to adverse price movements, reflecting market depth. Assuming unchanged liquidity, halving the bid/offer spread will reduce trading costs by 0.23bp for a nominal amount of EUR100m.
Eurex significantly enhanced the attractiveness and liquidity of Euro-Schatz futures by halving the tick size three years ago. Today Euro-Schatz futures are the second most actively traded interest-rate derivative product at Eurex, behind only Euro-Bund futures.
Of Eurex’s full derivatives product range, Euro-Schatz futures rank fourth, after Euro-Bund futures and Dow Jones Euro Stoxx 50 index options and futures. Eurex traded 58 million Euro-Schatz futures contracts in the first four months of 2007, an increase of 31 percent over the same period of 2004. The daily average volume currently stands at 700,000 contracts.
Meanwhile, Eurex has reversed its previous decision to reduce the tick size for calendar spreads for Euro-Bund and Euro-Bobl futures with effect from May 21 after numerous exchange participants voiced concerns regarding the handling of synthetic orders for the execution of trades at reduced tick sizes in the individual order books. However, synthetic orders at reduced tick sizes are inevitable where spread and single-leg orders with different tick sizes are integrated in a single order book.
