On August 19th, MX will introduce implied pricing on our Two-year Government of Canada Bond Futures (CGZ), Five-year Government of Canada Bond Futures (CGF) and Thirty-year Government of Canada Bond Futures (LGB) contracts.

Implied Pricing

The introduction of implied pricing enhances the price discovery mechanism for the CGZ, CGF and LGB contracts, generating synthetic orders from regular orders in the order book.

These regular orders can be either:
·    two individual legs, known as an implied “In” order, or
·   an individual leg and a strategy involving that leg, known as an implied “Out” order.

It is important to note that first in, first out (FIFO) will be respected at all times within the context of the implied pricing market model, as such, regular orders will always have price/time priority over implied orders.

The Benefits

Derivatives markets benefit greatly from implied pricing, especially in the case of contracts with limited liquidity. It does so by keeping leg and spread prices where they should be, regardless of whether there is sufficient arbitrage activity in the contract itself to keep prices at a fair level.

Implied pricing allows the order books of spreads and outrights to interact, allowing tighter spread markets to generate improved outright markets, and vice versa. It eliminates the legging risk inherent in the use of legging functionalities available on trading software applications and seeks the best available price based on strategy and individual leg orders, thereby improving efficiency and execution for clients. It also mitigates the risk of erroneous order entry and subsequent trade adjustments or cancellations.

Furthermore, as implied pricing ensures that prices attributed to the legs comprising a strategy will be representative of market conditions at the time of execution, it mitigates risks of very large capital inflows and outflows in client accounts.

For further information or to arrange an interview with an MX executive, please contact me at 416-814-8834 or catherine.kee@tmx.com.

Regards,

Catherine Kee