Arbitrageurs and market makers are necessary in order to create a liquid market. Bitcoin futures contracts are relatively easy to market make and arbitrage because the underlying is Bitcoin and anyone with an internet connection can trade Bitcoin. Market making or arbitraging futures contracts with China stocks as the underlying is more difficult.
A few years back, the Singapore Exchange launched a USD quanto futures contract on the CHINA A50 Index. I was trading the SGX A50 futures contract when it first listed. Recently, the SGX A50 futures contract has become a flow monster and is the only liquid way for investors outside of China to go long or short the China A share market with leverage.
To jump start liquidity, BitMEX has copied some of the contract terms of the SGX product. This allows traders with access to the SGX to easily market make and arbitrage the BitMEX China A50 futures contract.
SGX vs. BitMEX
The difference between the SGX and BitMEX futures product is that the SGX product pays out USD and the BitMEX product pays out Bitcoin (XBT), and the settlement index. Both futures contracts expire on the same day and at the same time. The BitMEX product uses the BitMEX China A50 Index for settlement.
SGX $1 USD per 1 CNY
BitMEX 0.0001 XBT per 1 CNY
SGX vs. BitMEX Trading Hours
The below table lists the trading hours of the SGX contract:
|00:45 – 01:00||08:45 – 09:00||Pre-Open|
|01:00 – 07:55||09:00 – 15:55||Open|
|07:55 – 08:00||15:55 – 16:00||Pre-Close|
|08:30 – 08:40||16:30 – 16:40||PM Pre-Open|
|08:40 – 15:59||16:40 – 23:59||PM Open|
|16:00 – 18:00||00:00 – 02:00||PM Open|
The BitMEX contract is open 24/7. While the SGX is open, market makers can use the SGX futures price as their price on BitMEX (there is a caveat to this that I will mention later).
Once the SGX contract ceases trading during US market hours, another product must be used as a proxy for China. From 18:00 GMT to 21:00 GMT, traders can use one of the many China ETFs. The CSOP AFTY ETF is an ETF that replicates the same index as the BitMEX futures contract. Traders can imply the fair value of the China A50 index by taking the Net Asset Value (NAV) of AFTY using the last traded prices of the ETF constituents, and then looking at the percentage change vs. the current market price of the AFTY ETF.
Market Price / NAV – 1 = Implied Change in China A50 Index
From the US close to the Asian open the next day, there is no product that trades with the China A50 as an underlying. We expect in the future that the BitMEX futures contract will become the leading indicator of where the Chinese equity market will open.
Assume the following:
XBTUSD = $100
Long 1 SGX A50 at 10,000 CNY
Short 100 BitMEX A50 at 10,000 CNY
SGX: $1 * 10,000 CNY * 1 Contract = $10,000
BitMEX: 0.0001 XBT * 10,000 CNY * -100 Contracts * $100 = -$10,000
SGX: $1 * 10,000 CNY * 1 Contract / $100 = 100 XBT
BitMEX: 0.0001 XBT * 10,000 CNY * -100 Contracts = -100 XBT
The settlement price is 11,000 CNY
Profit and Loss (PNL)
SGX: (11,000 CNY – 10,000 CNY) * $1 * 1 Contract = $1,000
BitMEX: (11,000 CNY – 10,000 CNY) * 0.0001 XBT * -100 Contracts = -10 XBT
Net PNL in XBT
SGX: $1,000 / $100 = 10 XBT
BitMEX: -10 XBT
Net: 0 XBT
Net PNL in XBT if XBTUSD rises to $200
SGX: $1,000 / $200 = 5 XBT
BitMEX: -10 XBT
Net: -5 XBT
Net PNL in XBT if XBTUSD falls to $50
SGX: $1,000 / $50 = 20 XBT
BitMEX: -10 XBT
Net: 10 XBT
Because of the different payout currencies, as a market maker your PNL has exposure to the XBTUSD rate. This is your quanto risk, and the covariance between XBTUSD and the China A50 Index is relevant to your net PNL at settlement.
Market Maker Rebates
To entice traders to provide liquidity, BitMEX offers a trading rebate for passive or maker orders. Makers will be paid 0.10% of the Bitcoin value of their order on each fill.
BitMEX China A50 Index Futures Contract Details
Trade BitMEX China A50 Index Futures