EQD Research

Liquidity Providers And Seekers Embrace New Block Facility For E-mini S&P 500 Options

Sep 21, 2021

By Russell Rhoads,
head of research

One of the biggest issues in the financial markets over the past year and a half has been a lack of liquidity in the OTC space. According to the most recent outreach conducted by EQD Research, as the market reacted to uncertainty associated with the pandemic, liquidity issues for OTC transactions manifested in a number of asset classes. Many market participants have turned to listed solutions in response to not being able to find favorable pricing in OTC markets. CME Group responded to this increased need for liquidity through launching a mechanism to facilitate E-mini S&P 500 option block trading in early June this year, with the close support of global liquidity provider partners like Optiver.

Leaf Wade, Institutional Trader, Derivatives at Optiver commented, “Optiver is committed to providing bespoke liquidity in CME’s new S&P E-mini block facility as an extension to our trusted European derivatives pricing. This liquidity is continuously accessible during European and US hours and can be incredibility meaningful for firms looking to receive best in class execution on an order at a single price. We believe it will be particularly additive prior to US hours.”

The new block trading method of accessing S&P 500 liquidity has caught on quickly. There is nothing unique about a block trade execution, but the CME’s round the clock trading capabilities make for an interesting proposition especially for Asian and European investors. For example, a block trade combining September E-mini S&P 500 futures (ES futures) and December E-mini options on futures (ES options) hit the tape Friday, August 13. A single negotiated trade bought 48 September ES futures, purchased 300 December ES 4450 puts, and sold 300 December ES 4425 puts.  While hardly a sizeable volume by itself, this trade printed at 4:36 AM in New York, while most traders in the United States were still sleeping. This around the clock source of liquidity is important, especially given the global attraction of the US equity markets.

Tim McCourt, CME Group Global Head of Equity Index and Alternative Investment Products, noted that “Block trading of E-mini S&P 500 options has gained traction with more than 500,000 total contracts transacted since their June 7 introduction. These transaction types are highly complementary to our deep, E-mini S&P 500 options liquidity in our central limit order book accessible via CME Globex. Block trades allow market participants to replicate certain trades traditionally executed in OTC markets or via other venues, but with greater cost-efficiency and the benefits of centralized clearing at CME Group. Additionally, E-mini S&P 500 options block trades can be 100 percent completely executed via a private, bilateral negotiation, and subsequently submitted to CME Group, further helping clients manage counterparty credit exposure with no break-up risk.”

CME has also greatly expanded the number of expirations available, offering longer dated expirations coincide with expirations in other major equity index futures such as the EuroStoxx 50 or Nikkei 225. Typically, there are 43 E-mini S&P 500 expirations available including several near term Monday, Wednesday, and Friday expirations along with expirations five years into the future. The access to block size liquidity outside of US hours facilitates instances where firms want to execute trades that combine exposure to the S&P 500 and EuroStoxx 50 or Nikkei 225. A single transaction combining contracts in multiple markets are easily negotiated with the ability to execute a large complex multi-market trade with a single liquidity provider.

To enhance the attractiveness of the E-mini block offering, CME has also taken the step of consolidating its S&P 500 product offerings with the recent retirement of the “big SPU” upon September expiration. The retirement of the large S&P futures contract means that the E-mini contract is now the contract of choice for institutions. E-mini S&P 500 futures and options have a $50 multiplier. This places the current notional value of each ES futures contract at around $225,000. The ‘E-mini’ name goes back to 1997, when the S&P 500 was under 1000 and the notional value was less than a quarter of what it is today. Most market participants already think of the E-mini futures and options as the contract to gain exposure to the S&P 500, and in fact, the E-mini is the most active product. Consolidating the product set modernizes and centralizes liquidity and is welcomed by all market participants.

The retirement of the big S&P 500 future along with a streamlined method of accessing E-mini S&P 500 option liquidity providers assures this market will be available when needed with reasonable market pricing and spreads. In addition, the options are available for trading outside regular US market hours, both through Globex and block executions. The changes and enhancements made by CME Group and participation by liquidity providers assures when the next bout of volatility hits global markets, that there is a market available to speculate or implement hedges based on goals and a specific market outlook.