Nikkei 225 implied Inter-commodity Spreads

Easily trade the only exchange-listed futures quanto spread

With the Introduction of a new inter-commodity spread between USD- and Yen-denominated Nikkei 225 Index futures, it is now easier than ever to trade the Nikkei 225 futures quanto spread directly. Key features include:

  • Implied spreading capability Enriched liquidity
  • Tighter spreads
  • Greater capital efficiency

Summary:

CME has introduced the ability to trade the Nikkei 225 quanto spread directly as a single CME Globex trade. This functionality allows 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 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 inter-commodity 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 Inter-commodity Spread:

The new Nikkei 225 futures inter-commodity 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 inter-commodity spread he or she will be buying one (1) NKD contract and simultaneously selling one (1) NIY contract.

The Nikkei 225 inter-commodity spread order book could look as follows.

NKDZ7-NIYZ7

Size

Bid

Offer

Size

 

5

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 inter-commodity spread book and another investor chooses to sell at 40 (so NKD-NIY = 40), the price of the executed contracts would normally be based on the price of the most recently traded outright leg2 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 inter-commodity spread (19385-19345 = 40). Thus, each leg’s price would be 19385 (NKD) and 19345 (NIY) and the fill in the inter-commodity spread would be at a price of 40.

Please note a spread order will first be matched in the inter-commodity 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 inter-commodity spread book.

What is “implied in and implied out” functionality?

There are three order books which can interact with each other – the inter-commodity 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 inter-commodity 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 inter-commodity spread book and the other outright order book.  These “implied out” orders are generated from originating orders in the inter-commodity spread book.

“Implied-in” orders in the inter-commodity 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 inter-commodity spread has “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 inter-commodity spread at a price of 45, then an order will be added to the NKD outright book as follows:

NKD

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 inter-commodity 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 inter-commodity 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.     Is the “implied in” functionality applied to the inter-commodity spread?

Yes “implied in” functionality is present meaning that prices from the outright books can be be used to imply prices in the inter-commodity spread.

2.     When was this inter-commodity spread be introduced?

The first day of trading for the spread contract was onOctober 30, 2017. What are the ticker symbols?

There are no new tickers to trade the Nikkei 225 futures inter-commodity 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

Outright Nikkei 225 USD   NKD

Outright Nikkei 225 Yen    NIY

3.     What does one (1) spread unit represent?

One (1) Nikkei 225 futures inter-commodity spread represents a purchase of one (1) USD-denominated Nikkei 225 futures contract and a sell of one (1) Yen-denominated Nikkei 225 futures contract.

4.     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.

5.     What are the margin arrangements?

A Nikkei 225 futures inter-commodity 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 July 30, 2019, the initial margin per 1:1 spread contract is $654 versus $9,219 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.

6.     Will non-quarterly contracts be involved in the spread trade?

No, only quarterly contracts can be used in the Nikkei 225 futures inter-commodity spread trade.

Sources

  1. [my] represents the appropriate month and year code applicable. Thus, for December 2017 contracts for the Nikkei 225 futures inter-commodity spread, the code would be NKDZ7-NIYZ7.
  2. Exceptions to this method of determining leg prices apply in specific circumstances. For a full description of the determination of the leg prices, please follow this link: https://www.cmegroup.com/confluence/display/EPICSANDBOX/Spreads+and+Combinations+Available+on+CME+Globex#SpreadsandCombinationsAvailableonCMEGlobex-Inter-CommodityFuturesspread

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