Ticking the box: tick size reduction for futures calendar spreads for EURO STOXX/STOXX Europe 600-Banks Futures

Why is the tick size being changed – what is the advantage?

This tick reduction in the roll books makes things easier for passive long or short position holders who roll four times a year to get the full 12-month exposure to the underlying instruments. We want to create a friendlier environment for passive open interest holders, to lower their costs, which frees up capital and reduces slippage. The change also removes the incentive to trade in blocks outside of the market and increases volumes through the order book. Order book trading is open and transparent, in other words, exactly what an exchange stands for. Overall, it reduces costs for participants and increases the use of Eurex contracts, a win-win for all.

How do we go about changing tick sizes?

First, I would like to point out that we do not take such a measure lightly. We do a lot of consultation with clients in advance and perform detailed analysis of contract data before deciding on any changes.

The first time we did a tick change was in August 2017 with the STOXX® Europe 600 futures contract, a heavily traded product. It was preceded by intensive client communication, not just with our working committee for our largest customers but also bilateral conversations with numerous clients. We used data analysis, especially of block trades, to establish what the effective tick size was members were trying to emulate, which we then validated with clients. Liquidity providers are also key, and we made sure we had these on board for the tick size reduction. After the change we then had an evaluation period encompassing six roll periods to confirm that our adjustment was improving the liquidity picture. Only then, after this “test case”, did we look at other heavily traded products and used the same procedure for the contract change to our banks futures FESB and FSTB.

Are there any member concerns?

No, not really. We know that any changes to contract specification, indeed to market structure overall, means changes for members and we are sensitive to the fact that this could come with a cost. So, there must be a concrete benefit for clients, a boost to liquidity and an improvement to the order book.

We are only changing the calendar roll and not the outright contracts – this would have a much bigger impact and clients would be far more sensitive. A consequence is that we have to decouple the outright order books and switch off synthetic matching, our liquidity providers are then able to step-in to provide calendar roll quotes.

Can we expect tick size adjustments in other products?

After the change we will again analyse the next few rolls, present this to and validate with clients and sometime in 2020 we will have the results. If this is positive and grows liquidity, changes could be expanded to other popular contracts, but it is too early to be more specific.