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A relevant director of DCE said that in order to encourage arbitrage trading, measures like favorable margin and position holding exemption have been studied at DCE recently, to further improve market mechanism and enhance market operation efficiency and service capability, after the core trading system was matched and optimized for arbitrage in January.
Through arbitrage trading, spread income is obtained by buying and selling two futures contracts at the same time. Arbitrage trading facilitates forming reasonable contract spread level, increasing contract liquidity, and stabilizing market operation. It also can enrich market trading modes, help institutional investors participate in market and promote the improvement of market customer structure as well. According to some introduction, arbitrage trading is widely used in international derivative markets, and is a trading mode preferred by hedge funds, asset management companies, market makers and other institutional investors who pursue low risk and scale income, and its global trading volume accounting for more than 40% of the total. The advantage of arbitrage trading lies in the fact that it may ensure that all varieties of contracts involved with an investor’s arbitrage strategy are traded at the same time, and arbitrage prices can be locked in to avoid price risks arising from trading the contracts one by one.
According to the head of the trading department of DCE, given the active role of arbitrage trading in the operation of futures markets, DCE introduced inter-temporal arbitrage trading order in June 2007, introduced cross-variety arbitrage trading order in April 2008, introduced extension swap order in June 2009, and matched and optimized its core trading system at the beginning of this year. The arbitrage trading order of DCE took the same quotation methods and trading principle as that of CME electronic trading system, and is composed of two trading orders of contracts that must be traded at the same time and are put in the system in the form of spread. Arbitrage orders may be traded either along with basic orders, or with other arbitrage orders that are in the opposite direction, with the trading results directly recorded in the latest quotations of the two contracts. All transactions made at DCE, including arbitrage order, should follow the fundamental principle of “giving a priority to prices and time”. As for the orders that meet the requirements for trading, arbitrage order does not enjoy preferential trading rights, compared with ordinary orders.
At present DCE can provide investors with a few arbitrage orders, such as inter-temporal, cross-variety and extension arbitrage orders, which are applied to all the nine varieties. Arbitrage trading orders have become one of the important trading instruments at Dalian futures market, and its trading volume has jumped to the current daily average of over 100,000 contracts from less than 10,000 contracts in 2007, with its proportion rising to around 3.69% from 0.89% in 2007. To further promote arbitrage trading, DCE raised the derivation and matching efficiency by optimizing and matching system arbitrage at the beginning of this year, and thus greatly improved the handling property of its trading system. The extension of the maximum taxation form has declined by over 60%, and the function of releasing direct real-time arbitrage trading prices to market has been added, making market prices more transparent.
But the director reminded investors that the trading price may be different from the basic order quotation of a contract, because when the trading of one of the two contracts in arbitrage trading halts and the arbitrage order can not trade with basic order, the arbitrage order in the opposite direction is allowed to trade in order to create more trading opportunities for arbitrage trading. But an exchange may make real-time disclosure of the trading information of arbitrage order and reflects it in the latest quotations, to increase the market transparency, thereby leading to the latest prices beyond the optimal real-time trading price of the contract. When the trading of coke and soybean meal contracts closed recently because their prices exceeded certain limit, the quotations of related contracts showed the latest price went beyond the optimal real-time trading price. And investors should not misunderstand this phenomenon.
And the director also say DCE will further promote the optimization of arbitrage trading order, based on the principle of serving markets and improving market efficiency. It is considering studying and learning from foreign measures on favorable arbitrage margin and position holding exemption. Given the suggestions of some market insiders that arbitrage trading information should be filtered when releasing quotations, that arbitrage trading should be specially marked when displaying quotations or arbitrage trading information should be separately released by learning from CME methods, DCE will make careful research. Meanwhile, DCE hopes its members and customers to provide more suggestions and opinions, to improve its arbitrage trading and market operation mechanism. As most investors are not familiar with arbitrage trading order, DCE will strengthen training service next and do more market publicity, to let market participants obtain more understanding of arbitrage order and apply it more widely.
Market insiders point out that incentive measures such as favorable margin and position holding exemption are widely taken in international markets with respect to arbitrage trading, because arbitrage trading plays a big role in stabilizing market prices and improving liquidity, and is very safe as well. Domestic futures market should actively learn from international experiences and encourage the development of arbitrage trading at domestic markets. According to Shi Yan, vice director of the research institute of Xinhu Futures Co., Ltd., the Chinese futures market structure is undergoing fundamental changes at present, and institutional investors pursuing low risks and scale incomes will gradually become important trading subjects in market and have more requirements for arbitrage order and stop-loss order commonly used at international futures markets. The practice of DCE to optimize arbitrage matching rules and to study and promote favorable arbitrage trading margin and position holding exemption adapts to the trend of market development. It will make the trading system of futures market more perfect and further raise market efficiency, reduce systematic risks at market and facilitate the play of market functions.
