Shanghai Stock Exchange asks market makers to increase liquidity in crude futures

BEIJING (Reuters) – Shanghai International Energy Exchange (INE) is considering appointing market makers to boost trading volumes in its nascent crude oil futures amid growing liquidity concerns as the first contract expires later this month.

A tanker unloads crude oil at a crude oil terminal in Zhoushan, Zhejiang province, China July 4, 2018. Picture taken July 4, 2018. REUTERS/Stringer

In response to a Reuters report earlier on Thursday, INE, which is part of the Shanghai Futures Exchange (ShFE), said in an email that it was considering the introduction of a market maker program following the demands of certain investors.

The exchange has approached at least two major brokerages in recent weeks to find investors to help boost business in the less active months ahead, two sources familiar with the matter said.

These investors would be similar to market makers, which are often deployed by international exchanges such as CME Group Inc and Intercontinental Exchange to fuel activity in new contracts.

“In recent days, some market investors have asked the exchange to follow the practices of other international exchanges and introduce the market making system to provide more liquidity for futures contracts,” the statement said. INE.

“We are seriously considering investor demand and requests and are currently reviewing and seeking advice from investors for a plan,” the exchange said.

Potential candidates for the position would be institutional investors, such as wealth managers and hedge funds, the sources said. The sources declined to be identified as they are not authorized to speak to the media.

The move comes amid fears among investors and brokers that market liquidity will be concentrated in the September contract, which expires at the end of this month.

The September expiry is seen as a big test for China’s first yuan-denominated oil contract, which was launched four months ago in a bid to gain more leverage over global crude prices.

“More investors will postpone their contracts from September to December in the coming weeks. At present, the liquidity in December is not high enough to attract large investors,” said Wang Xiao, head of research. on crude oil at Guotai Junan Futures.

State-controlled oil majors have helped provide liquidity, but securing commitments from other investors to do so would bolster efforts to increase interest in the market.

(For a chart on “China’s Rise in Gross Liquidity”, click reut.rs/2KiPBug)

PLACE IN THIRD IN TURNOVER

Monthly exchange data shows that the contract’s turnover has increased since its launch. In July, it accounted for 7% of global oil futures turnover, taking third place behind London Brent and the US West Texas Intermediate (WTI), with Arab oil heavyweight Dubai in fourth. position.

But the bulk of daily turnover and open interest, a measure of liquidity, is concentrated in the September contract, which expires at the end of this month. The December contract has a group of activities, but the decline is steep.

Chinese commodity futures investors typically do not trade consistently across months, but rather choose specific months in which to trade.

This complicates efforts to trade spreads between Brent, WTI and Shanghai.

“The monthly gap between Shanghai contracts and global oil futures has created arbitrage difficulties,” Wang said.

Having more liquidity spread over the coming months is seen as important for attracting international hedge funds and other financial players, who like to trade month by month.

Open interest in the first five months of the Brent and WTI contracts and is relatively evenly distributed.

INE cut fees for October and November contracts last month and cut them on Tuesday for January and February, which was seen as an effort to spread cash more evenly over the coming months. and to engage in industrial traders such as refiners who tend to trade month by month, the INE said.

Combined open interest in those four contracts was just 445 lots on Thursday, which equates to just under 500,000 barrels of oil and tiny compared to September which had almost 14,000 lots of open interest.

(For a graph on the “Rise of Shanghai Crude Oil”, click on reut.rs/2n39gFu)

Reporting by Meng Meng and Josephine Mason; Editing by Eric Meijer and Tom Hogue

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