The Chicago Board of Trade yesterday announced the appointment of Alternative Strategy Advisers LLC as an electronic market maker for its 10-year municipal note futures contract.
Beginning Jan. 3, ASA will provide continuous two-sided markets on CBOTs electronic trading platform in municipal futures between 7:20 a.m. and 2:00 p.m. Central Standard Time.
This initiative will provide increased trading opportunities for CBOT customers and is exemplary of the exchanges ongoing effort to pursue all avenues to enhance the liquidity and efficiency within CBOT markets, said Robert Ray, a senior vice president of business development at the board of trade.
CBOT started the current version of the muni futures contract in 2002 to replace an older version which was based upon The Bond Buyer 40 index and had suffered from declining trading volume as some charged its settlement prices were being manipulated. The new contract is based on an index that CBOT maintains and which consists of a larger pool of bonds.
By agreeing to pay or receive the difference between a set price and the value of the index at a future date, the product is intended to function as a tool allowing users to hedge their municipal interest rate risk.
But trading volume of the new muni futures contract has remained low as many market participants have preferred to use swaps and Treasury futures contracts as hedging tools. In November of this year, 3,403 muni futures contracts traded.
To boost volume, CBOT last year appointed New York-based Nassau Street Capital LLC as a market maker for floor trades.
Now, ASA will make markets in outright transactions over an electronic platform with a minimum depth of 50 contracts per side and a maximum bid-offer spread of four ticks, or 4/32 of a percentage point, under typical market conditions. In addition, the firm will provide quotes at a variety of prices and accompanying size outside of the best market price.
Minneapolis-based ASA is a fixed-income investment management firm that specializes in municipal bonds and has been an active user of the muni futures contract.
