15 Oct 2018

Eurex | Eurex Clearing

Harold de Boer, Transtrend: “This will improve the price discovery process and general stability of markets”

A commodity trading advisor’s opinion on Eurex’ plan to extend its trading hours into the Asian time zones
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Eurex runs global markets and continues to enhance its services. As of December 2018, we will extend our trading hours into the Asian time zones to strengthen the bridge between Asia, Europe and the U.S. We discussed this subject with Harold de Boer, Managing Director at Rotterdam-based Transtrend.

Transtrend specializes in active systematic investment management. Their Diversified Trend Program trades global futures markets, both outright and in a wide variety of combinations. The program is geared towards capturing the underlying trends. We spoke to Harold about his take on Eurex’ plan: 

Eurex expands its trading hours – what do you think?

That is definitely good news. Eurex was always ahead in many ways, but here it was behind. Among the trends in which DTP participates are those driven by diverging monetary policies in different parts of the world. For instance by trading the spread versus European and Australian bonds. In our trading of these spreads, we were limited to European trading hours. Now that Eurex is stepping up, we can also trade these during Australian hours, which really is an improvement. Apart from that, we believe that the extension of trading hours is an appropriate answer to changes in market dynamics.   

What exactly has changed?

European benchmarks for the Asian markets

Benchmark products like DAX® Futures, Mini-DAX® Futures, EURO STOXX 50® Index Futures, MSCI Futures contract and Interest Rate Futures offer access to European markets and are the cornerstone when it comes to managing interest rate risk and diversifying portfolios.
Relevant news or events typically trigger a price discovery process, with prices moving towards a level that reflects the new information. Screen-traded markets have become reasonably effective in digesting such new information, provided this information comes out when the screens are open. However, if the information arrives when they are closed, price discovery has to happen during the opening auction. In the old floor trading times, this functioned well. Before the market opened there was a lot of verbal communication between participants. Investors used to adapt their bids, offers and order sizes based on this communication. This effectively was an equilibrium phase without actual trading.

In screen-traded markets, this phase does not exist. Execution strategies do not communicate with each other before trading commences. They only ‘communicate’ via bids and offers in the screen. If the majority of orders would be actively participating in price discovery, this could still result in a meaningful outcome of the auction. However, nowadays a substantial part of the total order flow assumes well-functioning auctions instead of actively contributing to their well-functioning. Such price-insensitive orders essentially hinder the price discovery process. 

Why would extended trading hours be an answer to this problem?

Extended trading hours increase the probability that the price impact of new information is appropriately digested before large flows of price-insensitive orders arrive in the screens. We believe this will improve the general stability of markets.

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