In a move to bolster usage of the municipal bond futures contract, the Chicago Board of Trade has recently contacted some firms about becoming market makers on an electronic platform for the contract, market sources said.
First launched in 2002 to replace an older version of the product which had lost the interest of many traders who charged its settlement prices were being manipulated, usage of the CBOT 10-Year Municipal Note Index Futures contract has still languished, according to market sources. The previous contract had been based on The Bond Buyer 40 bond index. The new contract is based on an index consisting of a larger pool of bonds, which is maintained by the CBOT.
The contract serves as a means for market participants to hedge their municipal bond interest rate risk by agreeing to pay or receive the difference between a set price and the value of the underlying index at some future date.
In an attempt to generate more interest in the product, the board of trade last year started a new electronic trading platform, on which the municipal contract could be traded, and appointed the New York-based Nassau Street Capital LLC to serve as sole market maker for floor trades of the contract. The firm provides a two-sided market, in which the bid-ask spreads are no wider than "four ticks," or 4/32's of a percentage point, for 20 contracts. Wider spreads apply when greater numbers of contracts are involved.
But the market has still been lacking liquidity, according to Randy Jacobus, a principal and hedge fund manager at ASA LLC in Minnetonka, Minn.
Today, only about 200 contracts trade per day, and open interest in the product totals only about 3,000 contracts, according to Jacobus. To be more viable, he said that daily trading volume should total more than 1,000 contracts, and open interest should run in the range of at least 10,000 to 15,000 contracts.
By appointing more market makers to the electronic platform for the muni contract, it would bring more transparency to the product by displaying numerous bids and offers, and likely provide a deeper market, according to Jacobus. That could entice more muni bond traders and other types of futures contract traders to use the muni note contract more frequently, improving its liquidity, he said.
A spokeswoman for CBOT did not comment on the plans, except to say that the board had no intention of phasing out the pit in which the muni futures contract is traded on the floor of the exchange.
