Bid-ask spread trends

Report notes

1. The report is based on the bid-ask spread of exchange-traded instruments, specifically New Zealand electricity futures and options contracts traded on the ASX platform.

2. The Authority acquires ASX data on a subscription basis. Snapshot price and trade data is received following the close of trade each day. See https://www.asx.com.au/products/energy-derivatives/new-zealand-electricity.htm for a complete description of contract specification terms, including reference locations, units, commodity types, and contract durations. The Authority also receives so-called tick data from the ASX24 trading platform on a weekly basis. The tick data allows us to observe the state of the market at any point in time. See https://www.asx.com.au/documents/products/asx-market-data-protocol-specification.pdf for a complete description of the ASX24 market data.

3. This report makes use of the ASX24 market data, which allows us to view the state of the order book for any instrument at any point in a trading session. Using this data we are able to form a snapshot of the state of all orders in the market on a minute-by-minute basis throughout the trading session. For example, a standard trading session runs from 10:00 to 16:00 Sydney time yielding 360 snapshots. For each snapshot the bid-ask spread of each tradeable instrument is calculated as (best sell quote - best buy quote) / best sell quote. These spread values are then averaged over the selected instruments and time scale. The range of spread values is taken to be the minimum and maximum spread values over all selected instruments for the given time scale. Snapshots are excluded if the order book does not contain both a buy and a sell order in any minute.

4. While market-making arrangements for New Zealand electricity futures include bid-ask spread requirements, these requirements only apply to an agreed volume. Once a market maker trades their required volume, they are no longer required to post quotes within a set spread limit. Therefore, it is possible that all market makers are compliant even if the average spread over any particular market-making session exceeds the market-making spread limit. For more information on market making, see the market-making activity report.

5. Duration refers to the time period over which futures and options contracts are defined. Currently used durations are monthly, quarterly, or calendar-year strips. Monthly contracts are introduced at the beginning of each quarter for the two quarters ahead. Quarterly contracts for all quarters in a year are introduced on the first trading day of the fourth quarter for the quarters of the year four years ahead. Monthly and quarterly contracts may be traded from the time they are introduced until they expire. Strips contain a strip of four quarterly contracts covering one calendar year. They are introduced at the beginning of the fourth quarter for the year four years ahead, and may be traded up until the end of the first quarter in their year of expiration.

6. Maturity or expiry dates apply for all individual contracts for each instrument, commodity type and duration. Users can select a specific contract expiry date that, when combined with a location, commodity type, and duration, define a specific contract.

7. Commodity types are baseload and peak. Baseload commodities refer to 0.1 MW of electrical energy per hour for every hour of the contract's duration. Peak commodities only exist for quarterly durations and refer to 0.1 MW of electrical energy per hour for all hours between 7:00am and 10:00pm on each business day within the contract's duration.

8. The show parameter can be used to filter the spread calculation to include measurements for the entire trading session or for the market-making session only. The market-making session runs from 15:30 to 16:00 New Zealand time each trading day that market-making services are provided.

9. The series filter can be used to select what is displayed on the chart. The Spread (Average) series shows the average of all spread values recorded for the selected data. The Spread (Range) series shows the difference between the minimum and maximum of all spread values recorded for the selected data. The Market-making spread requirements series shows the upper limit on the spread of quotes included in market-making arrangements at the time. Note that these arrangements have changed through time. In addition, when the time scale is set to Day, the number of market makers meeting the market-making obligations is reported in the tooltip.