Liquidity of COMEX Gold & Silver is Excellent

CME Group’s Globex, the electronic trading platform, was developed to enable the exchange to become a global marketplace with an after-hours trading platform. The ability to conduct electronic trading round-the-clock was an important factor behind the volume growth of COMEX gold and silver volumes. Before that innovation, transactions were conducted primarily on the trading floor where buyers and sellers had to physically gather together to negotiate prices during U.S. business hours.

With Globex, it became much easier to access the markets anytime, anywhere, on a level playing field. This capability was enhanced over time, as internet and electronic trading technologies developed. Nowadays, more than 95% of COMEX gold and silver futures volume are done electronically

For traders based in Asia, the benefits were obvious, as e-trading removed the physical and business hour constraints presented by traditional floor trading. It enabled traders to directly participate in the markets in their time zones and during their hours of business. And as overall volumes continued to grow, the portion traded outside of U.S. regular trading hours, defined here as 8 a.m. to 8.p.m. Singapore time (Asia hours), has also increased over the past few years.

In 2012, around 190,000 lots a day of Gold futures were traded, of which less than one quarter took place during Asia hours. The average daily volume (ADV), and the proportion of Asia hours trading, have gradually increased to 380,000 lots and 35% respectively in the first quarter of 2018. For Silver futures, liquidity has hugely improved from around 55,000 lots ADV in 2012 to more than 100,000 lots in the first quarter of 2018. The percentage traded during Asia hours has also increased from 21% to 29% during that period.

Source: CME Group

To reiterate the point about the liquidity of COMEX Gold and Silver futures during Asia trading hours, their top-of-book bid/ask spreads and order quantities were examined². Bid/ask spread has a direct impact on trading cost, as do the quantity or size of trades that could be traded at a specified bid and ask prices needed to move the market price. Both spread and quantity are important market liquidity measures closely monitored by professional traders.

As shown in Figures 4, COMEX Gold futures are priced in U.S. dollars per troy ounce and the minimum tick size is ten cents ($0.10). COMEX Silver futures are priced in U.S. cents[i] per troy ounce and the minimum tick size is half a cent ($0.005)[ii]. Figure 5 shows the Gold and Silver futures’ best bid/ask spreads and quantities by hour. The gold market exhibited tight bid/ask spread of one tick during almost all trading hours. The average bid/ask quantity was also robust; while it tends to be higher during U.S. peak hours, the average quantity during Asia hours is healthy, ranging from 15 to 24 lots, meaning that about 1,500-2,400 troy ounces (or 48-77 kg) of gold can be executed within one trade at 1 tick ($0.10) wide during Asia hours.

Like Gold Futures, bid/ask spread of Silver Futures is also tight at one tick wide most of the hours. Bid/ask quantity is at its highest during U.S. trading hours; nevertheless, it is still decent during Asia hours, ranging from 22 lots to 27 lots, meaning that about 110,000 – 135,000 troy ounces (or 3.5 – 4.3 tonnes) of silver can be executed within one trade at 1 tick (0.5 cent) wide during Asia hours.

Source: CME Group

Another way to demonstrate the deep liquidity of COMEX Gold and Silver futures during Asia hours is to observe their volumes and tick spreads at increasing depth of book. Figure 6 showed that traders can consistently trade at least about 20 lots of gold or silver futures during Asia hours without impacting prices, and would hit only the third or fourth best quoted price when trading 100 lots.

Figures 6 and 7 showed that the bid-ask spread at the best prices are consistently 1 tick wide for both gold and silver futures, and even when comparing the fifth best bid verses fifth best ask prices, the spread is only 9 ticks wide during Asia hours.

Options are often used by sophisticated traders as the contracts add great flexibility to portfolio management and trading strategy. Options can be used alone or in combination with futures contracts, providing strategies to fit any risk profile, time horizon or cost consideration. Like the benchmark GC contract, CME Group also operates the world’s most liquid gold options (code: OG) market. Each OG Call or Put gives the holder of the contract the right to buy or sell the underlying futures at a specified price and time. Currently OG trades about 40,000 lots, or 12 million kilogram notional quantity of gold every day.

Source: CME Group

Nevertheless, as new technologies and functionalities developed on electronic trading platforms in recent years, e-trading has also now become the main venue of COMEX Gold Options trading. Five years ago, electronic trading accounted for only 40% of the overall OG volume. Today about 80% of OG volume is transacted electronically.

Also, as COMEX Gold Options became more electronic, the proportion of volumes transacted during Asia hours has increased, testifying to the benefits of electronic trading. In 2012, about 2% of the overall OG were traded during Asia hours. That figure increased to over 10% in 2017, and the proportion is expected to rise further in the future.

One major facilitator in the volume shift is the introduction of Request for Quotes (RFQ) functionality. An RFQ is electronic notification sent to all CME Globex participants that expresses interest in a specific strategy or instrument. The users can create new multi-legged spread for trading, and the RFQ will alert interested participants to submit bids and offers on the specified instrument. This allows participants to execute option strategies at one price eliminating leg risk, at the same time get competitive quotes even during times of low market activity.

There are two pertinent features about the OG options to take note of. If exercised, the OG options exercise into the underlying GC futures. OG contracts are listed monthly, whereas GC futures contracts are listed for even months (plus the front three contract months). The GC contract months which the various OG contract months would exercise into are shown in Figure 7.

To trade an option, a trader has to specify the type (call or put), exercise price (strike price) and time of expiration (contract months). It is common for a trading strategy to include combination of multiple legs of option contracts with different types, exercise prices and contract months. Due to this multi-dimension characteristic of option contracts that makes trading more complicated, a small proportion of OG remains non-electronically traded.

Asia is known as the biggest demand center for commodities as countries in the region continuing to show strong economy growth compared to the rest of the world. There is a natural need for firms and end users to manage price risks tied to Asia market events during local business hours. The increasing activities in CME Group’s precious metals futures and options contracts during Asia hours reflects this trading need being met. At the same time, the deepening liquidity also presents trading opportunities to all market participants in the region.

1. In this article, all volumes are quoted in contract lots. Whereas in another paper on “Trading Gold and Silver – COMEX vs SHFE / TOCOM” volumes are quoted in kilograms, to enable comparisons to be made between the exchanges.
2. Average bid/ask spread and quantity of the most active contract month during first quarter of 2018 The figures are the average of minute-level bid/ask price spread and quantity calculated as time weighted average.
3. The Silver Futures price is quoted in U.S. cents per troy ounce, and prices are disseminated in USD per troy ounce.
4. For outright. Reduced tick size $0.001 is applicable to spread transactions, for the purpose of this paper we examine outright transactions.
5. CME Group also lists COMEX Gold Weekly Options for shorter dated hedging needs. Refer to the CME Group website for details.
6. Minimum 40 strikes at $5.00 per troy ounce strike increment above and below the at-the-money strike then 10 strikes at $10.00 per troy ounce strike increment above and below the highest and lowest $5.00 increment strike then 8 strikes at $25.00 per troy ounce strike increment above and below the highest and lowest $10.00 increment strike. Dynamic strikes at $5.00 per troy ounce strike increment above and below the highest and lowest pre-listed strikes.
7. To learn more about the various Option Trading strategies, please refer to our CME Group Institute website https://institute.cmegroup.com/search-results?q=options.