CME reduces natgas price increment in bid to boost trading volume

Reuters

By Jeanine Prezioso

NEW YORK, Oct 11 (Reuters) - Two Chicago Mercantile Exchange natural gas futures contracts will soon trade in $1increments, down from the current $10 "tick", in the exchange'sbid to boost trading volume and to match the value of itsEuropean gas options contract.

Beginning Oct. 21, CME said it will reduce the minimum"tick" size to $1 for two natural gas "penultimate" futurescontracts, or contracts that settle the day before the CME'sbenchmark front-month New York Mercantile Exchange Henry Hubnatural gas futures contract expires.

The two natural gas futures contracts, the "NP" and "HP" are being adjusted to match the value of CME's European optionscontract on the underlying Henry Hub contract. The NP contractis for 2,500 million British thermal units (mmBtu) and HP is for10,000 mmBtu.

Investors generally use the two contracts to offsetmovements in the options contracts, which expire the day beforethe more heavily traded Henry Hub contract settles. An optionconveys the right to buy or sell an underlying commodity futurescontract at a set price. It can be used to offset or "hedge" themove in a straight futures price.

Demand for natural gas in the United States has not keptpace with the ballooning supplies being pulled from shalereserves. Global producers and end users of natural gas stillneed to hedge their price exposure as global gas prices are attimes double the U.S. price, market makers said.

"Exchanges flourish in a region if demand grows, notsupply," said one former NYMEX trader who runs a small privateequity fund. "And demand isn't U.S.-based anymore."

Analysts say the move will help CME do what it intends,boost volumes. When the Hong Kong Futures Exchange tightened theminimum quote tick, share turnover doubled, said Diego Perfumo,an analyst who covers exchanges for Equity Research Desk inGreenwich, Connecticut.

"Similarly CME natural gas volumes are expected to grow asthe minimum tick is reduced and the spread tightens," he said.

Open interest, which indicates the number of outstandingcontracts on any given day, in the NP contract, the more heavilytraded of the two contracts, which is one-quarter the size ofthe HP contract, has been roughly half of the 1.6 million peakhit in March 2012.

Contract volumes, which reflect the total number of contactsbought or sold in a day, have been very choppy but have remainedaround the 29,000 per-day average over the last two years.

CME's energy volume averaged 1.6 million contracts per dayin September 2013, down 7 percent from the same month last year,the exchange said last week.

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