US futures exchanges target retail investors with ‘mini’ contracts

The biggest US futures exchanges are producing miniature versions of some of their most popular contracts to attract traders being pushed out of the market by rising costs.

CME Group, Intercontinental Exchange (ICE) and Cboe Global Markets have all created smaller versions of their widely traded futures contracts, which allow investors to place bets on the direction of share prices, for example, or the level of volatility in the market. The new products are a fraction of the cost to trade, as they come in smaller increments and are targeted at what the exchanges call the “sophisticated” retail investor.

At the end of the month, ICE will shrink a contract tracking the US’s most actively traded technology stocks to a tenth of its current size. The contract, known as the NYSE Fang+ Index Future, covers 10 stocks including Facebook, Apple and Tesla.

Last month, Cboe relaunched a mini-future on its popular Vix volatility index, a benchmark that serves as a measure of expected swings in US stocks and is commonly called Wall Street’s “fear gauge”. It traded almost 127,000 contracts during the first week.

CME Group, the world’s largest futures exchange, has begun offering options — which offer the right to buy — tied to “micro” versions of its eMini future, the contract that traders around the world use as a marker for the direction of the S&P 500 blue-chip index. The “micro” version, launched last year, has become the fastest-growing product in the group’s 172-year history.

Such derivatives offer exposure to the world’s most actively traded markets and are frequently used by institutional investors looking to speculate or hedge.

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But the US stock market’s ascent to record levels is pricing out smaller traders, market participants say. The notional value of futures contracts for equities are based on the level of the underlying market. The fees that brokers charge customers are a fraction of that notional value, so contracts become more expensive to trade as the underlying index rises.

Michael Shirley, head of trading at OSTC, a UK company that trains people to become traders, said the rising size of the main eMini contract made it harder for his students to keep risks in check. The smaller version “is one that we’re going to get into in 2021”, he said.

NYSE’s Fang+ index has risen 430 per cent in value since 2015, and 70 per cent this year alone. Cutting its contract multiplier to a tenth will reduce the notional value of each futures contract to approximately $24,000. The value of the CME’s eMini contract, meanwhile, has risen from $50,000 at its inception in 1997 to $170,000 today.

Arianne Criqui, head of options and global client services at Cboe, said the smaller contract should appeal to investors such as commodity trading advisers who try to ride major market trends.

“There’s a growing demand for all kinds of micro and mini contracts,” she said. “We think this growth is here to stay.”



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