Securities Daily: Tick Size of HRC Futures Reduced to RMB1 / ton

Updated on Apr 25,2015

By Yu Deliang

In order to adapt to the changes in the spot market and meet the market demands, further improve the market efficiency and reduce the transaction costs for all market participants, recently the Shanghai Futures Exchange (SHFE) has released the newly revised the standard contract of the hot-rolled coil (HRC) futures to change the tick size from RMB2 / ton to RMB1 / ton, which shall come into effect at the call auction at the opening of the continuous trading at 20:55 on April 27, 2015.

The tick size is the smallest unit of the price change in the trading of financial products, and a reasonable tick size helps improve the efficiency of the contract trading and the liquidity as well as reduce the transaction costs for all participants. An SHFE official said that in the early period of the listing of the HRC futures, considering the spot prices at that time, the SHFE set the tick size at RMB 2 / ton. Since last year, with the slowdown of the domestic economic growth, the pattern of oversupply in the iron and steel industry and of the imported iron ore has continued further, and the prices of all the steel futures products have recorded significant drops. The price of the dominant HRC contract has declined from RMB3,324 / ton at the closing of the first listing day to about RMB2,380 / ton at present, a drop of nearly 30%. The original tick size of RMB2 / ton was relatively large compared with the price of the product, making the transaction costs of all market participants at comparatively high levels and affecting the further improvement of the market efficiency and the market structure.

The market participants said that a rational tick size will make the contract brisker to some extent and improve the functioning of the futures product. If the tick size is too small, the market will lack sufficient depth and the trading efficiency will decline; if the tick size is too large, the transaction costs will increase, affecting the liquidity of the contract. The SHFE has reduced the tick size of the hot-rolled coil to adapt to the changes in the market situation, and the adjustment of the tick size to RMB1 / ton is in line with the market reality and the principles for contract design, and it will help reduce the transaction costs and make all market participants more active in participation.