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On April 30, after 28 trading days of heated transactions, trading after a fiery, the simulation testing of Dalian Commodity Exchange (DCE) for market making of the soybean meal options (the “Collaborative Testing” for short) was crowned with success. The process of the Collaborative Testing recorded sound trading operation, high-degree briskness of the market and desirable performance of the market makers in fulfilling obligations. Through the Collaborative Testing, DCE has gained further understanding about the structure of the existing target groups of market makers, the level of market making and the support of the technical system in China, which has provided a useful reference for implementing the market making system after the listing of the options.
With high-degree market participation and liquidity of all contracts, the Collaborative Testing recorded an average daily trading volume of 16.8 million contracts (unilateral, the same below), an average daily open interest of 2.78 million contracts and a total exercising volume of 30,000 contracts. The number of clients participating in the trading reached 19,000. The average option implied volatility stood at about 40%, higher than the historical volatility of the soybean meal futures, showing a high level of briskness. Most of the brisk contracts were the contracts of the options at the money with the exercising price at RMB 2,800 and the trading volume of call options was higher than that of the put options.
With regard to the market making, there were 35 market makers actually participating in the Collaborative Testing with a daily average trading volume of 5.8 million contracts, accounting for 17% of the total for the options. According to the assessment of the market makers, the spreads of the contracts and the time of continuous quoting were quite reasonable, as the best 5-level bid-ask spread of the dominant contract sectors was 4 tick sizes and the average best bid-ask spread was lower than 1.5 tick sizes. The average continuous quoting time ratio for the dominant contract sectors was about 60%, basically meeting the requirement for the market making obligations. The function of the market makers responding to the inquiry was also tested and improved during the Collaborative Testing.
An official of the DCE Transaction Department said that in major overseas options markets, as the main market liquidity providers, the market makers play an important role. As the options feature a plurality of exercising prices for the contract of the same month and a large number of contracts, the contract liquidity is usually insufficient. The Collaborative Testing was an across-the-board drill as well as a pressure test for the trading of the soybean meal options. During the testing, DCE followed and analyzed the market quotation, liquidity, system operation and other conditions, and learned about the trading characteristics of the market makers and their impact on the market, which provided reference for improving the plans and supervisory indicators for the market making system in the following work.
The support of the technical system for the entire market was also tested during the process. In the meantime, all parties concerned timely analyzed the problems such as long settlement time of the system, insufficient support of the end system for a small number of members, instable system interface and the market making strategies yet to be improved, boosted the optimization of the system and further consolidated the foundation for the listing of the options.
After the testing, DCE will continue to open the option simulation system to the market, effectively provide the platform service for the market to get familiar with the system and test the rules, and make full preparations for the listing of the soybean meal options.
The Collaborative Testing received active response from futures companies and investors. The market institutions and investors regarded the testing as a training opportunity for the listing and trading of agricultural options, making the size of the Collaborative Testing greatly exceed the expectations.
