Guest Post : Negotiated Large Trades

This is a good article written by a friend last year about Negotiated Large Trades (NLT) that is a facility provided by all exchanges to prevent excessive market volatility, that happens to be the least of our concerns right now.

Despite all the negative publicity in the news about sinister dark pool trading which are sometimes confused with NLTs (NLT is supervised by the exchange and usually involves futures contracts), there are benefits of conducting business on the side.

Barclays is the most recent bank in the news, challenging fraud allegations on their dark pool platform. http://www.bbc.com/news/business-28465825

It just demonstrates the vulnerability of our markets and how good intentions can lead to exploitation as far as greed is concerned.

Reproduced with the permission of Robin Hood of Nottingham.

The benefits of Singapore Exchange’s Negotiated Large Trade facility to market participants.

The Singapore Exchange (SGX) provides a Negotiated Large Trade (NLT) facility to market participants, which allows them to benefit in a multitude of ways. By using the NLT facility, market players can perform various “off the market” or Over The Counter (OTC) type of transactions, which in turn are booked by a clearing member on the SGX ehub clearing system, which is registered on the exchange in the usual manner, as if it was transacted like a conventional futures contract.

So let’s take a look at how NLT’s can benefit players.

Timed / volume based orders

Let say a Hedge Fund wants to gain exposure to SGX China A50 over the day at the day’s average price. Yes there are various vendors or banks that provide such algorithms on electronic trading systems that try and emulate volume weighted average, or time weighted average prices (VWAP / TWAP), but there are also market makers that take on such risk and can guarantee say VWAP as per Bloombergs pricing for a particular trading period. So lets say pre-market Hedge Fund A agrees to buy 1,000 lots at the days VWAP (as per Bloomberg) which was arranged by his clearing broker with Market Maker B. At the end of the trading day the clearing broker submits an NLT via ehub and is registered and cleared on the exchange, as if it was executed in the conventional fashion.

Options Liquidity

Options are listed on the SGX and there are market makers that have been signed up by the exchange to provide liquidity. Let’s assume that one would like to gain exposure in a deep out of the money call. Usually the bid / offer spread will be wide and the quote would be for a small amount. Insurance company B wants to gain exposure and for an amount that is greater then on screen. He calls his broker who in turns asks a market maker for the option and the price is agreed. This trade would again be booked as a NLT on the exchange.

Reduction in margin

The SGX Nikkei gives markets participants the opportunity to arbitrage the Osaka Nikkei, buying in one market and selling on the other. At the end of the day their positions are hedged, but they are left paying margin on the open contracts on both exchanges. A way to “close out” the open contracts (with no market risk) is to find an opposite party with the opposite position and enter into an NLT for the SGX and the equivalent on Osaka (known as Tachiaigai), thus reducing margin payable on the two exchanges. Sometimes this can be done at flat, other times there may be a small charge a market maker would charge.

Ability to trade mid-market.

One of the biggest advantages of NLT is experienced monthly by equity futures market participants. SGX lists monthly equity futures that need to be rolled to the next calendar month if the holder of the future wants to keep their exposure. There is an active roll market for all equity futures, but it is the ability of entering into amid-market NLT that offers huge cost savings. The China A50 for example is trading at a spread of 25/30 (tick size is 5 and value is $5). It is possible to trade at mid-market at 27.5 by enlisting help of a broker that will actively seek the other side of ones positions. Assume Bank D has to long roll 1000 lots and tells his broker that he can buy at 27.5 (ie mid market), the broker will ask his clients or other brokers if they want to sell at 27.5. If they can find a seller at 27.5 they can “trade” and enter the NLT, by doing this the participants have saved $2,500 USD each by not crossing the bid / offer spread (1000 lots *2.5USD). The SGX NLT market for Equity futures is very active.

The SGX Negotiated Large Trade facility is a function that can assist participants in a variety of ways, helping them to save costs on bid / offer spreads, can minimize margin payable, helps to source liquidity and ease of trading options and can facilitate easier exposure on various markets. NLTs can be performed and executed on all SGX listed contracts and is subject to a minimum of 50 lots for outrights and 25 lots for options.