CME reduces natgas price increment in bid to boost trading volume

NEW YORK Fri Oct 11, 2013 1:18pm EDT

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

Beginning Oct. 21, CME said it will reduce the minimum "tick" size to $1 for two natural gas "penultimate" futures contracts, or contracts that settle the day before the CME's benchmark front-month New York Mercantile Exchange Henry Hub natural 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 options contract on the underlying Henry Hub contract. The NP contract is for 2,500 million British thermal units (mmBtu) and HP is for 10,000 mmBtu.

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

Demand for natural gas in the United States has not kept pace with the ballooning supplies being pulled from shale reserves. Global producers and end users of natural gas still need to hedge their price exposure as global gas prices are at times double the U.S. price, market makers said.

"Exchanges flourish in a region if demand grows, not supply," said one former NYMEX trader who runs a small private equity 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 the minimum quote tick, share turnover doubled, said Diego Perfumo, an analyst who covers exchanges for Equity Research Desk in Greenwich, Connecticut.

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

Open interest, which indicates the number of outstanding contracts on any given day, in the NP contract, the more heavily traded of the two contracts, which is one-quarter the size of the HP contract, has been roughly half of the 1.6 million peak hit in March 2012.

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

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