Hong Kong Mercantile Exchange Strong Gold Trading Debut
The Hong Kong Mercantile Exchange (HKMEx) opened for business yesterday, May 18, with the launch of its physically delivered, 32 oz, USD settled, gold futures contract. Total volume for the day was 3,929 contracts (notional US$188.54 million) with August and December futures being active in what was clearly spread trading between these two months. Trading did in fact start slowly with only two contracts trading hands in the first 30 minutes attributed to ICBC as the HKMEx’s first trades but surpassed 1000 contracts only after 4 and a half hours trading. The London open saw a flurry of another 1000 contracts trading hands and then more activity could be seen during the open of the US gold market.
Spread trading is where two futures contracts are bought and sold simultaneously. If you buy the spread you buy August and sell December (assuming you wish to trade the August December spread). The idea is that the net price of the spread between the two months fluctuates and profit is made by trading this fluctuation. For example, the August December spread is priced at US$2 and as a buyer it will cost you $2. Over time the spread increases to $2.50 and you can make a 50cent profit by selling the spread. Brokers and exchange like these kinds of trades as they generate 2 commissions and the risk profile and subsequent margin requirement are much lower than buying or selling the outright month.
If we take a look at how much gold was traded around Asia yesterday you can see that on its debut the HKMEx performed very well in the front months but the more established Shanghai and Tokyo showed much higher volumes in the December months. These December contracts are actively traded as gold will be delivered at the end of the year for consumption. Who is to say that HKMEx wont develop a large December open interest and volume but as we can see they could take the lead as a gold futures trading market in the front months. The market microstructure seems to support active trading with a healthy, liquid order book showing tight spreads between the front and back months. In fact, Barry White MD Patsystems said “the spreads looked as good as a mature market” . The SMX has been offering cash-settled gold contracts for a month now but can’t seem to get the trading volume needed to be a liquidity center.
AsiaEtrading ran an opinion poll before the HK Merc went live asking “How many contracts would the Hong Kong Mercantile exchange trade on its debut”. As you can see results were largely split between the pessimists and the optimists. The turnout of voters for the poll also indicated an interest in gold trading in Hong Kong as well.
The exchange had been waiting for regulatory approval for more than 3 years but seems the wait has been worth it as trading on the first day attests. Will the HKMEx become the preferred gold market for active traders in Asia? Time will tell.