Development of trading schemes
| The TAIFEX builds the domestic futures market base on the characteristics of futures products, foreign trading schemes and the experience of domestic securities market. In response to diverse trading strategies and rapid growth of the futures market since established, the TAIFEX has timely stipulated and amended relevant rules to meet the market’s needs. Some of measures of the futures market are even set up earlier than the domestic securities market, for example, the disclose of the best five bid/ask information, the adoption of continuous matching for trade execution, the introduction of combination orders to the existing order types, etc. The major developments of the trading schemes of the futures market are addressed below.
|I、||Allow the FCMs to accept online trading orders from clients and transmit to the TAIFEX via Direct Market Access (DMA)|
| In response to the global trend of electronic trading to enhance efficiency and reduce trading cost, in September 1999, the TAIFEX allowed the FCMs to accept online orders from clients. Since then, the proportion of online trading volume out of total trading volume grew dramatically. The popularity of online trading had greatly contributed to the increase of trading volume of the futures market and was one of the reasons for the rapid growth of trading volume after the listing of options.
Besides, for the stability and safety of the electronic trading system and in response to the demand of direct connection for institutional investors to transmit orders, the TAIFEX allowed the FCMs to implement DMA (Direct Market Access) to attract foreign institutional investors to further engage in the trading in domestic market.
|II、||Introduction of continuous matching for all futures products|
| When the domestic futures market opened for business in July 1998, all orders were executed through call auctions regardless of trading at the opening, during trading hours, or at the closing. The call auctions were conducted every 30 seconds at that time. With the gradual increase of trading volume and the enhancement of system efficiency, the interval of call auctions was shortened from every 30 seconds to every 20 seconds on 4 December, 1998, and further reduced to every 10 seconds on 6 December, 1999, to enhance the efficiency of trade execution.
On December 24, 2001, in response to the listing of the TAIEX Options and the completion of the home-built options trading system, the TAIFEX started to execute TAIEX Options orders by continuous matching during trading hours. After the opening auction, orders are executed immediately upon entering the order book until the closing auction. This change greatly improved the efficiency of order execution, which led to the adoption of continuous matching for all futures products beginning from July 29, 2002.
|III、||Relaxation of position limits|
| To avoid excessive speculation and over-concentrated positions that may impact market price or lead to manipulation, the TAIFEX imposed position limits on investors since the opening of the futures market in 1998. Taking TAIEX Futures for example, at first, the upper threshold of position was 100 contracts for individuals and 300 contracts for institutions. With the increase of trading volume, the position limits were relaxed to be 300 contracts for individuals on March 5, 1999 and 1,000 contracts for institutions on May 5, 2000. In addition, the automated adjustment mechanism for position limits was established beginning January 1, 2004. The mechanism sets correspondent position limits for equity index futures based on futures market scale. That is, the position limits for equity index futures were set to be 5% of the average daily trading volume or open interest whichever is larger for individuals and 10% of the larger of the two for institutions. The position limits for options were set to be 4 times of the futures with the same underlying. The market entered a phase of stable growth with the automated adjustment mechanism.
In light of the gradual maturing of the futures market, the position limits were further relaxed on January 15, 2007. The TAIFEX adjusted the method of determining position limits for futures from summing up of long and short positions to separate calculation long position and short position. For equity index options, due to the fact that the market scale of TAIEX Options was much bigger than TAIEX Futures, the TAIFEX amended the position limits for equity index options to base on the average daily trading volume or open interest per quarter, whichever is larger. At the same time, the proprietary trading business of the FCMs, who were not subject to position limits previously, were imposed with position limits that are 3 times of position limits of institutions.
In order to make it flexible for participants to trade when market changes, the position limits for 14 futures products such as the Electronic Sector Index Futures were relaxed on February 20, 2013.
|IV、||Extension of trading hours|
| The trading hours of futures market was from 9:00 a.m. to 12:15 p.m. from Monday to Saturday. On January 2, 2001, in response to the market development and international competition as well as the implementation of two-day weekend policy, the TAIFEX changed trading hours to be from 8:45 a.m. to 1:15 p.m. from Monday to Friday (the futures market opened 15 minutes earlier than cash market, and closed 15 minutes later than cash market) to exert the function of price discovery and hedging. Also, in response to future development and the global trend of around-the-clock trading, the TAIFEX had been researching for feasible ways to extend trading hours.
In order to meet the trading and hedging needs of offshore ETFs for domestic investors, the TAIFEX extended the trading hours of offshore ETF Futures to be from 1:45 p.m. to 4:15 p.m. on July 20, 2015, to fully cover the trading time of the underlying indexes tracked by offshore ETFs. The extension allows investors to conduct relevant investment and hedging trades in response to the latest market conditions after the cash market closes. In addition, the trading hours of block trades were also extended to close at 4:15 p.m. The last trading day of the expiration month contract will still close at 1:30 p.m. In order to make it convenient for investors to respond to fluctuations in the international gold market, on June 27, 2016, trading hours of gold futures and options (including TAIFEX Gold Futures, TAIFEX NT Dollar Gold Futures and Gold Options) were extended from 5 hours to 7.5 hours (8:45 a.m. to 4:15 p.m.) to benefit investors to trade and hedge.
|V、||Establishment of market-making programs|
| In response to the listing of the first options product (TAIEX Options) in Taiwan, and considering the excessive listed series of options and that investors were unfamiliar with options at the early stage of market development, on December 24, 2001, the TAIFEX launched the market-making program for options to enhance liquidity of the market. Market makers provided two-way quotations for buying and selling to enhance liquidity of the market. The market-making program contributed to the rapid growth of the trading volume of TAIEX Options since the product was launched.
In addition, considering some futures products were not actively traded, the TAIFEX launched the market-making program for futures products on October 1, 2007 in response to the demand for liquidity of new products so as to promote the trading of futures.
|VI、||Introduction of new order types, adjustment of maximum order size and the market with protection orders|
| In response to the characteristics of options and the completion of home-built options trading system, beginning from 24 December, 2001, combination orders (including calendar spread orders, price spread orders, straddles, strangles, conversion as well as reversals) were added to the order types provided by the TAIFEX. Also, orders could be marked with qualifiers of IOC (Immediate or Cancel) or FOK (Fill or kill) for the convenience of investors to execute common trading strategies of options. With the substantial increase in trading volume of options, the TAIFEX adjusted the maximum size of an options order from 100 contracts to 200 contracts to strengthen the efficiency of the market and the convenience of placing orders.
Starting from May 27, 2019, market orders are limited to 10 contracts per order for the regular trading session and 5 contracts per order for the after-hours trading session, respectively. Meanwhile, the order sizes for limit orders and market with protection orders (MWP) remain unchanged, with 100 contracts for futures and 200 contracts for options, except for the equity futures and options, the maximum quantity per order is 499 contracts.
In order to reduce the situation that the trading price of a "market order" may significantly deviate from the expectation of investor due to insufficient liquidity of the contract or the instantaneous imbalance of buy and sell orders, a new order type, "market with protection(MWP) order", is introduced on May 12, 2014, in addition to "market order" and "limit order". Investors do not need to specify price when placing MWP order, once the TAIFEX system receives an MWP order, a buy(sell) order will be converted into a limited buy(sell) order with the price of the existing best bid plus (best ask minus) the protection points for execution.
|VII、||Introduction of futures calendar spread orders|
| In order to help participants to roll over positions more efficiently and to enhance the price discovery function of outright contracts through introducing the trading of calendar spreads, on October 8, 2007, the TAIFEX introduced futures calendar spread order. A calendar spread order is an order that simultaneously long and short futures contracts of the same underlying but with different expirations. The two contracts(legs) must be executed at the same time for the calendar spread order to be executed.
|VIII、||Adding new order price amendment function|
| On May 3, 2010, the TAIFEX started to offer the new order price amendment function to increase the efficiency of order execution. If participants decided to change order price, the trading system would cancel the unfilled orders and replace them with new orders at the new designated price at the same time. In other words, traders could execute price amendment with just one step during trading session instead of cancelling and resubmitting orders.
The function of the new order price amendment was available to ROD limit orders. Besides, traders could convert limit orders into market orders. The price of a market order could not be amended. The execution priority of an amended order would be queued according to the time its price was changed. Also, price-time priority will be followed when orders are executed.
|IX、||Adjustment of strike price intervals and the way of listing strikes for options|
|i. Equity Index Options:
In order to satisfy the market demand of trading out-of-the-money options and executing strategic hedges and trades, on October 25, 2010, the TAIFEX introduced new rules of listing options strikes, in addition to the increased listed strikes in 2002, 2004 and 2005.
Furthermore, on July 24, 2017, The TAIFEX moved the threshold of TXO from 10,000 points to 15,000 points. In this way, if the underlying index lies between 3,000 and 15,000, the strike price intervals will be 100 points for spot-month contracts and 200 points for quarterly-month contracts. If the underlying index was higher than 15,000, the strike price intervals will be 200 points for spot-month contracts and 400 points for quarterly-month contracts.
On November 19, 2018, for domestic equity index options, TXO, TEO, TFO, XIO and GTO, TAIFEX lists 3 near-month contracts (Spot month and the next two calendar months) and 2 quarter-month contracts (the next two quarterly months that follow the 3 near-month contracts). As the strike interval of quarter-month contracts is twice of that of near-month contracts, when a quarter-month contract becomes a near-month contract, new strikes based on the interval of near-month contract shall be listed. In order to decrease the number of listing strikes, previously such new strikes are listed within the range of the existing highest strike and the lowest strike of the quarter-month contract. Under the new strike listing rule, new strikes (in addition to existing strikes) will only be listed for the range of ±15% of previous day’s closing price of the underlying index based on the strike interval of near-month contract.
ii. Equity Options:
Due to the strike price interval of the Single Stock Options is too wide, in order to make the interval smaller to catch the underlying price fluctuation, beginning on July 20, 2015, for Single Stock Options with strike price between 2 NTD to 10 NTD, the interval is reduced from 1 NTD to 0.2 NTD; strike price between 10 NTD to 25 NTD, the interval is reduced from 2 NTD to 0.5 NTD; the remaining intervals are reduced to be half of the original interval. Also, as the strike intervals are reduced, if just one at-the-money contract and two in-the-money and two out-of-the-money contracts are listed according the original rules, the covered range of underlying security price fluctuations would be narrowed. Thus, the TAIFEX refers to the approach of the near-month TAIEX Options, and sets the strikes of Single Stock Options to cover 15% above/below given days’ opening reference price of the underlying securities. Beginning on November 19, 2018, with reference to the major international exchanges, the strike interval of quarter-month contracts is adjusted to be twice of near-month contracts, and near-month contracts and quarter-month contracts are subject to different strike price intervals. The new strike price intervals listing provisions about quarter-month contracts becoming near-month contracts are added, which are the same as the previous equity index option listing method to reduce the number of listing series and to reduce the system and resource cost for FCMs.
|X、||Adjustment of single stock futures|
| On May 3, 2011, three major reforms to Single Stock Futures were launched as below:
|XI、||The introduction of block trades|
| In order to provide a convenient channel for large traders to handle large positions, on December 19, 2011, the block trade facility was applicable to TAIEX Futures, Mini-TAIEX Futures and TAIEX Options. On May 14, 2012, Single Stock/ETF Futures were also included to the applicable products. Thus, a total of four products were eligible to block trades. The minimum threshold required for block trades were 200 lots for futures and 400 lots for options, participants can use "outright orders" for a single contract and "combination orders" for a basket of different contracts, but only limit orders, no market orders, are allowed. Other provisions such as trading hours and price limits, are the same as regular trading.
Beginning on December 2, 2013, the block trade facility of Taiwan's futures market added Negotiated Block Trades in addition to the original Continuous Matching Block Trades. The eligible products include TAIEX Futures, Mini-TAIEX Futures, TAIEX Options and Single Stock/ETF Futures. The buyer and the seller negotiate price and quantity and then report to the TAIFEX to confirm the transaction. This can reduce the risk of executing through Continuous Matching that the counterparty or the executed quantity is uncertain which may result in inconvenience in the execution of the strategy with large positions.
The products listed since 2016 including FX products, foreign equity index futures (excluding TOPIX Futures) and Brent Crude Oil Futures are applicable to block trades. In order to enhance trading convenience, on May 27, 2019, the minimum block trades thresholds of TAIEX Futures, Mini-TAIEX Futures and TAIEX Options are reduced by half, and the minimum price fluctuation of TAIEX Options for block trades is changed to 0.1.
|XII、||The introduction of Weekly TAIEX Options contract|
| Weekly TAIEX Options contract was introduced on November 14, 2012, to meet the short-term trading and hedging needs of investors. The key points are as follows:
|XIII、||The introduction of pre-market information disclosure|
| In order to promote the transparency of pre-market information and diversify order types, on May 12, 2014, pre-market information disclosure of the futures market was introduced. For investors to obtain more pre-market information for trading reference, in addition to the original disclosure of the number of bid/ask orders and their cumulative quantity, from 8:30 a.m. to before market opening at 8:45 a.m., the simulated opening price and the best 5 bid/ask prices and volumes post each simulated matching were revealed. In order to avoid manipulation of the simulated matching information, submitted orders cannot be deleted or modified during 2-minute period prior to opening auction. In order to increase the reference value of the earlier disclosure information, the priority of the orders at the same price before the opening auction is adjusted from the current random to time priority.
|XIV、||Establishment of handling measures of the futures market in response to halts of trading in securities markets|
| In order to avoid the computer malfunctions of the securities market affecting the operation of the futures market, the futures market launched relevant measures on December 21, 2015. If the TWSE or the OTC announces halts of trading due to system malfunction or disruptions before the opening of the futures market (8:45 a.m.), the related equity index and equity contracts will be halted. If the trading of securities market resumed, the related contracts of the futures market would also be resumed, and following the current pre-market regulations, a call auction will be conducted after 15 minutes of receiving orders.
In addition, in response to the implementation of the procedures for verification and disclosure of material information of the securities market, on January 15, 2016, the futures market simultaneously implemented corresponding measures. If the trading of underlying securities of Single Stock/ETF Futures and Options are halted/resumed due to material information, the related equity futures and options will also halted/resumed the trading, and the orders will not be accepted during the halted period, and the orders that have not been filled before the halt of the trading will become invalid. In the event of a final trading (settlement) day, the last trading (settlement) day will be postponed to the next business day.
|XV、||The Kill Switch for futures commission merchants|
| In case of system malfunction, if the proprietary trading business of the FCMs can’t delete orders in time, it may result in huge losses, and affect the normal operation of the FCMs, or even seriously affect the market order. Considering the order transmission to the exchange should be stopped to avoid the chain reaction caused by system malfunction, on December 21, 2015, the TAIFEX offered Kill Switch for the FCMs. After the proprietary trading business of the FCMs obtained the right to use, they can trigger Kill Switch or resume trading by sending system messages or activate through the internet interface provided by the TAIFEX. After the TAIFEX trading system receives the Kill Switch order, the trading system will immediately stop the designated Session or reject sending or modifying orders / quotations from the 7-digit account number of the proprietary trading business, and then delete all unfilled orders / quotations of the designated Session or of the account of the proprietary trading business (including Continuous Matching block trades).
|XVI、||The introduction of after-hours trading of futures market|
| In order to provide better trading and hedging channels for futures market participants, the TAIFEX referred to the practice of major global markets and launched after-hours trading session on May 15, 2017, which allows the futures market to continue trading after the regular trading session ends. The rules are designed to reduce the impact on those who do not participate in the after-hours session to provide investors with a convenient after-hours trading platform. The trading hours of the equity index products of the futures market are extended from 5 hours to 19 hours, and the FX products extends from 7.5 hours to 19 hours.
The trading hours and current applicable products of the after-hours trading session are as follows:
|XVII、||The introduction of dynamic price banding mechanism|
| In order to strengthen the stability of market price, to prevent incidents such as error trades, fat fingers or intraday instantaneous order book imbalance, to reduce abnormal price fluctuations, and to protect investors, the TAIFEX implemented the dynamic price banding mechanism in a phased manner. On January 22, 2018, the mechanism was applied to the spot and the next calendar month contract and the calendar spread of the two expiry contracts of TAIEX Futures and Mini-TAIEX Futures. The mechanism was applied to all domestic index futures on November 19, 2018, to TAIEX Options on May 27, 2019, to foreign index futures on September 30, 2019 and to ETF Futures and FX Futures on June 8, 2020.
The TAIEX sets a real-time price range, and calculate a simulated price of each “new order” (excluding the implied orders derived from calendar spreads) of the applicable products for the dynamic price banding mechanism. If the simulated matched price is above the upper limit of dynamic price band for buying orders, or is below the lower limit of dynamic price band for selling orders, the order will be rejected. That is, the mechanism only reject buying (selling) orders that may cause abnormal spikes (crashes). Orders that buying at low prices or selling at high prices will not be rejected.
|XVIII、||Disclosure of the structure of open interest of large traders|
| With reference to the practice of the U.S. Commodity Futures Trading Commission (CFTC), since January 3, 2005, the structure of open interest of large traders has been disclosed (historical data dates back to July 1, 2004). This disclosure contains the sum and the proportion of open interest of the top 5, the top 10 large traders (including buyers and sellers) and the specific institutional investors.
Since April 7, 2008, information of major institutional investors of the futures market has been disclosed (historical data dates back to July 1, 2007) to enhance the information integrity and transparency in the securities and futures markets, which provides useful information for individuals and narrow the information gap between individuals and institutions.
This disclosure contains information including trading volume and trading value, open interest and contract value of major institutional investors. More detailed data by product type (such as futures or options) or by product are also available.
|XIX、||Establishment of omnibus account|
| In 2006, the TAIFEX allowed foreign investors to use omnibus account to engage in futures trading to attract foreign futures commission merchants to participate in futures trading in Taiwan. On June 3, 2014, the regulation for futures trading were relaxed (including the relaxation of the application qualifications, participation in futures trading via omnibus account without acquiring FINI ID for foreign individual investors, simplification of omnibus account reporting requirements. The relevant rules are stated as below.