Exchange Focus
CME Group: Streamline Your Trading with Nikkei 225 Futures Implied Intercommodity Spreads

Trading the only exchange-listed futures quanto spread just got easier.

October 2017

What’s changed?

  • October 30, 2017: Introduction of a new intercommodity spread between USD- and Yen-denominated Nikkei 225 Index futures
  • Now easier to trade the Nikkei 225 futures quanto spread directly
  • Implied spreading capability introduced
  • Enriched liquidity
  • Tighter spreads
  • Greater capital efficiency

Summary

CME is introducing the ability to trade the Nikkei 225 quanto spread directly as a single CME Globex trade. Available October 30, 2017, the new functionality will allow investors to trade the difference between the price of CME Nikkei 225 USD-denominated futures (NKD) and CME Nikkei 225 Yen-denominated futures (NIY) as a single instrument rather than entering two independent trades on the outright order book of each contract. Executing the trade via the new functionality ensures that both legs of the spread are executed simultaneously, which reduces the risk of one leg not being executed if each leg of the trade is executed independently.

An Easier Way to Trade

The Nikkei 225 intercommodity spread is arguably the most liquid listed quanto spread in the world. This new functionality will make trading the spread easier and add a third trading instrument to the complex, which will help to add more liquidity to the outright order books and can potentially make the market tighter.

More information on Nikkei 225 futures quanto spread trading can be found at:

cmegroup.com/quantospread

The current market spread practice

The spread currently can be priced as Nikkei 225 USD – Nikkei 225 Yen (NKD-NIY). Thus, if an investor buys one (1) unit of the spread they will be buying one (1) NKD contract and selling one (1) NIY contract.

The example below shows the order book of each Nikkei 225 futures contract. The cost of buying the spread, based on these outright books is 19390 -19340 = 50. The maximum size that could currently be bought is eight (8) contracts (i.e. the minimum size of the NIY bid or the NKD offer).

NKD

Size Bid Offer Size
5 19380 19390 10
10 19375 19395 8
8 19370 19400 10

NIY

Size Bid Offer Size
8 19340 19345 10
5 19335 19350 8
10 19330 19355 7

Similarly, if an investor chose to sell the spread, he or she would sell one (1) NKD contract and buy one (1) NIY contract. In the example above, this would result in a price of 19380 – 19345 = 35. In this example, the maximum size that could be sold is five (5) contracts (i.e. the minimum size of the NIY offer or the NKD bid).

Thus, the implied spread that can be found in the outright books example above is a bid of 35 and an offer of 50 on 5 x 8 contracts.

The Nikkei 225 Intercommodity Spread

The new Nikkei 225 futures intercommodity spread capability will replicate the above spread scenario but as a single trading instrument. The ticker symbol on Globex will appear as NKD[my]-NIY[my]1 and will be priced as one (1) unit of USD-denominated Nikkei 225 futures – one (1) unit of Yen-denominated Nikkei 225 futures (NKD-NIY) on a 1:1 ratio. Thus, if an investor buys one (1) unit of this intercommodity spread he or she will be buying one (1) NKD contract and simultaneously selling one (1) NIY contract.

The Nikkei 225 intercommodity spread order book could look as follows.

NKDZ7-NIYZ7

Size Bid Offer Size
8 35 50 8
10 30 55 5
8 25 60 10

The bid of 35 means an investor wishes to buy five (5) USD-denominated Nikkei 225 futures and sell five (5) Yen -denominated Nikkei 225 futures at a cost of 35 index points. The offer at 50 means another investor is willing to sell eight (8) USD-denominated Nikkei 225 futures and buy eight (8) Yen-denominated Nikkei 225 futures and receive 50 index points.

Now if an investor enters a bid at a price of 40 in the intercommodity spread book and another investor chooses to sell at 40 (so NKD-NIY = 40), the price of the executed contracts would be based on the price of the most recently traded outright leg of either NKD or NIY. If the most recent trade, for example, was in NKD at 19385 then the NIY price would be 19345 for the purposes of the intercommodity spread (19385-19345 = 40). Thus, each leg’s price would be 19385 (NKD) and 19345 (NIY) and the fill in the intercommodity spread would be at a price of 40.

Please note a spread order will first be matched in the intercommodity spread book itself, if possible. For any unmatched spread order the matching engine will attempt to match the spread order to outright orders if a three-way trade is possible and in this instance the price of the legs is self-determined. Failing that the spread order will rest as a bid or offer on the intercommodity spread book.

What is “implied in and implied out” functionality?

There are three order books which can interact with each other – the intercommodity spread order book, the USD-denominated Nikkei 225 outright book and the Yen-denominated Nikkei 225 outright book.

“Implied in” and “implied out” functionality refers to indicative orders being placed in the respective intercommodity spread or outright order books. For example, in one of the outright books there will be “implied-out” orders indicating 3-way trade opportunities with the intercommodity spread book and the other outright order book. These “implied out” orders are generated from originating orders in the intercommodity spread book.

“Implied-in” orders in the intercommodity spread book indicate three-way trading opportunities with the two outright books, provided by originating orders from the outright books. Together, these two types of functionality represent the “implied functionality”.

The Nikkei 225 futures intercommodity spread will have “implied out” functionality. This means that any bids and offers in the spread contract will use the current price of one leg in the outright book and place an additional order in the other outright book which implies the price of the spread contract.

For the 1:1 ratio initially listed, implied out orders will be placed directly into the outright order books. However please note that for other ratios which may be released in the future (e.g. 11:10 ratio), the contingency nature of the spread means implied out orders will be hidden within the outright books and only be executed if incoming orders are of sufficient size and price level to trigger the three-way ratio spread trade.

Example of “implied out” functionality

For the 1:1 ratio, if we continue to use the outright order books shown previously and an investor bids for two (2) contracts in the intercommodity spread at a price of 45, then an order will be added to the NKD outright book as follows:

NKDZ7-NIYZ7

Size Bid Offer Size
2 19385 19390 10
5 19380 19395 8
10 19375 19400 10
8 19370

NIY

Size Bid Offer Size
8 19340 19345 10
5 19335 19350 8
10 19330 19355 7

Now there is additional liquidity in the outright book NKD created by the intercommodity spread bid. If the 19385 bid in the NKD outright book gets hit, then contracts in the NIY order book will automatically be sold on the bid at 19340 and the intercommodity spread will be filled at a price of 45 (19385-19340 = 45). This will occur in a 1:1 ratio (in a size of up to two (2) contracts in this case) and the resultant outright order books will be as follows.

NKD

Size Bid Offer Size
5 19380 19390 10
10 19375 19395 8
8 19370 19400 10

NIY

Size Bid Offer Size
6 19340 19345 10
5 19335 19350 8
10 19330 19355 7

Frequently Asked Questions

1. Will “implied in” functionality be applied to the intercommodity spread?
Yes “implied in” functionality will be present meaning that prices from the outright books will be used to imply prices in the intercommodity spread.

2. When will this intercommodity spread be introduced?
The first day of trading for the spread contract will be October 30, 2017. Customer testing in the New Release environment is already available.

3. What are the ticker symbols?
There are no new tickers to trade the Nikkei 225 futures intercommodity spread. An investor seeking to trade the December 2017 spread on Globex will simply enter NKDZ7-NIYZ7.

Ticker Codes

CME Bloomberg Front Month Thompson Reuters Front Month
Nikkei Spread NKD[my]-NIY[my] TBC 1NK-IY[my]
Outright Nikkei 225 USD NKD NXA Index 0#1NK+
Outright Nikkei 225 Yen NIY NHA Index 0#1NIY+

4. What does one (1) spread unit represent?
One (1) Nikkei 225 futures intercommodity spread will represent a purchase of one (1) USD-denominated Nikkei 225 futures contract and a sell of one (1) Yen-denominated Nikkei 225 futures contract.

5. Are ratios other than 1:1 available?
No other ratios are currently available, but more may be introduced in the future should there be sufficient demand. Please inform CME Group of any interest in additional product enhancements, including other ratios or implied spreads between the NKD and NIY for calendar spreads.

6. What are the margin arrangements?
A Nikkei 225 futures intercommodity spread trade will result in reduced margin being posted to the exchange, given the fact that the individual legs of the contract are highly correlated. As of October 11, 2017, the initial margin per 1:1 spread contract is $529 versus $7,369 if the two individual outright contracts were margined separately.

Initial margin on both legs can be posted in USD, while the variation margin will need to be met in the respective currency of the underlying individual contracts.

7. Will non-quarterly contracts be involved in the spread trade?
No, only quarterly contracts will be used in the Nikkei 225 futures intercommodity spread trade.

8. Is this spread Mutual Offset System (MOS) eligible against the SGX?
Yes. The resulting legs in NKD and NIY are outrights, and both are MOS eligible.

1[my] represents the appropriate month and year code applicable. Thus, for December 2017 contracts for the Nikkei 225 futures intercommodity spread, the code would be NKDZ7-NIYZ7.

Further information:

If you would like further information, please contact CME Group.