Review on the Continuous Trading Program (I): Rise of Market Scale, Operational Quality

Updated on Jul 02,2014

July 2, 2014

By Zhang Fan

Special Report I to Mark the 1st Anniversary of the Continuous Trading Program of the SHFE

On July 5 last year, the Shanghai Futures Exchange (SHFE) launched the Continuous Trading Program, or the Night Trading Session, which, having been running smoothly for more than one year, has remarkably expanded the market scale of precious metals and non-ferrous metals, optimized the structure of investors, performed more thoroughly the functions of the market, and enhanced the international influence of the domestic market. Meanwhile, the operation and maintenance capacity of trading in the domestic futures market has been constantly improved, the risk management capacity has been further strengthened, the service of the market has been upgraded and the foundation for innovation and development has been consolidated.

Remarkable Expansion of the Market

There is no line that sums up more properly the progress that the Continuous Trading Program has brought to the market than the slogan on its advertising poster last year: “Continuous Trading Program, From Day Through Night”, and there is no more eye-catching products than precious metals and nonferrous metals in terms of trading volume, positions and number of participating clients.

According to the statistics, up to June 30, 2014, there have been 382 million contracts transacted in the Continuous Trading Program, which accounted for 28.01% of the total transaction volume of the same time. To be specific, the transaction volumes of gold, silver, copper, aluminum, zinc and lead futures in the Continuous Trading Program took up respectively 66.09%, 60.74%, 35.23%, 32.95%, 34.69% and 15.03% of the total transaction volumes of all the products. As for the total transaction volumes of precious metals in the market, the daily transaction volume of gold amounted to 231.2 thousand contracts, a 332.05% increase over last year, while that of silver hit 2,159,400 contracts, a year-on-year increase of 699.67%.

Among the nonferrous metals, the daily transaction volumes of copper, aluminum, and lead reached 585,600, 71,300, and 2,900 contracts, claiming respectively a year-on-year increase of 2.74%, 116.13% and 5.61%.

Since its launch, the Continuous Trading Program has not only boosted trading volumes, but also improved the price continuity of relevant products, increased open interests and attracted considerably more clients. Up to June 30, the open interests of gold futures have reached 205,600 contracts, a year-on-year increase of 67.35%; the open interests of silver futures have grown by 84.68% to 521,900 contracts; and the open interests of aluminum have increased by 61.12% to 348,900 contacts. The daily numbers of participating clients of gold, silver, copper, aluminum and lead futures have been respectively increased by 60.39%, 72.46%, 10.52%, 143.48% and 393.18%, compared with those of last year.

Remarkable Improvement of Operational Quality of the Products

Behind those splendid figures is the genuine improvement of the operational quality of relevant products. Most outstanding of them are gold, silver, copper and other hot products which have greatly improved the continuity of their prices.

As is calculated, the price gaps of relevant products have been narrowed since the launch of the Continuous Trading Program. Compared with last year, the average daily price gaps of gold, silver, copper, aluminum, zinc and lead were reduced respectively by 50.00%, 60.75%, 53.42%, 21.65%, 56.85% and 52.31%. The reduction of price gaps has improved the price continuity of domestic futures products and enhanced their function of price discovery.

At the same time, the share of the SHFE in the global market of precious metals has been increased notably. Statistics indicate that the ratio of the transaction volume of gold futures in the SHFE to that in the COMEX jumped from 0.08 before the launch of the Continuous Trading Program up to 0.23 after the launch, which translated into a rise of 2.9 times. The ratio of the transaction volume of silver futures in the SHFE to that in the COMEX jumped from 0.28 up to 2.3, a rise of 8.2 times. Since the launch of the Continuous Trading Program, the transaction volume of silver futures in the SHFE has ranked first globally, that of gold futures has come in the second place internationally and the first place in the Asian-Pacific region.

Commenting on the performance of the market after the launch of the Continuous Trading Program, Professor Hu Yuyue, Head of Securities and Futures Research Institute of Beijing Technology and Business University, told the journalist of the Futures Daily that as an innovated mechanism of the futures market, the Continuous Trading Program connected the domestic and overseas market effectively: “As the domestic futures market has not yet been thoroughly opened up, the Continuous Trading Program, by connecting to the international trading hours, has enabled the domestic prices to reflect international factors and increased China’s influence on the prices of bulk commodities.”

Hu also pointed out that the Continuous Trading Program has activated stock capital effectively. Since last year, the domestic futures market has launched 11 new products, but the scale of margins has not increased synchronously. The Continuous Trading Program has become an effective way to activate stock capital in the overnight trading hours, enhancing the efficiency of the use of margins.

If the expansion of the market has reflected the achievement of the Continuous Trading Program in macro level, the progress it has made in risk control, pricing mechanism and other micro aspects is even more significant.

“Since the launch of the Continuous Trading Program, the precious metals of the COMEX have touched off the circuit breaker several times because of big trends, but the domestic futures market of precious metals has been running steadily, which indicates that the exchange and the futures companies have grown increasingly mature in technology and risk control mechanism.” Xu Ling, General Manager of Haitong Futures said that as far as pricing mechanism is concerned, the nearby month contracts of gold and silver futures have been very active since the launch of the Continuous Trading Program, and have evinced more conspicuous co-movement trend with the corresponding nearby month contracts of the COMEX. What is more, The Continuous Trading Program has expanded to cover nonferrous metals, which has invigorated the role of “Chinese price” in the global pricing mechanism of nonferrous metals.

Besides, Xu also pointed out that the Continuous Trading Program has narrowed the price gaps resulting from time lags. Domestic investors can thus deal with sudden radical fluctuations of the fringe markets immediately, hence reducing the risk of holding positions overnight and also systematic risks. Companies too can avoid emergencies and policy risks better and take more initiative in space arbitrage.

Relevant Mechanisms will be Gradually Optimized

Last year, the SHFE launched the Continuous Trading Program which began with gold and silver and expanded to copper, aluminum, lead, zinc and other nonferrous metals. These products have gratified the people’s expectation of them in trading and operation, reflecting the vigor of the Continuous Trading Program. These precious practical experiences will help recruit more products to the “great troop” of the Continuous Trading Program, as well as laying a solid foundation for the constant improvement of the The Continuous Trading Program mechanism of the SHFE.

Relevant officials of the SHFE said that in the next step, the SHFE will draw on the successful experiences in the Continuous Trading Program so far and gradually optimize the products and trading hours of the Continuous Trading Program according to the established plans. Meanwhile, it will step up market training and the education of investors, providing customized training for futures companies, industrial clients, special unit clients and other investor groups, expanding the coverage of training on the Continuous Trading Program so as to enable investors to make good use of the Continuous Trading Program as a tool of risk management.

Source: Futures Daily