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| MINI contracts have MAJOR impact E-Mini futures contracts have been a shot in the arm for the futures industry, building volume and attracting retail traders. Here's an introduction to what these contracts are and how they trade. BY ACTIVE TRADER STAFF For years, futures exchanges have taken a shotgun approach to launching new pro- ducts: With a wide enough spray of buckshot, you're bound to hit something. For every new contract that has established a niche for itself, there are probably a dozen or more that faded into oblivion without notice. Traded any frozen shrimp or smog futures lately? Nobody else did, either. One genre of futures that has undeniably hit the target are the so-called "mini" contracts, such as the E-Mini S&P 500 (ES) traded on the Chicago Mercantile Exchange (CME). Although they are not entirely original - they are offshoots of already successful contracts - mini futures have been among the most successful new futures products of recent years. The mini idea was ingenious: Take an established product such as the S&P 500 futures contract and create a smaller version that will have great appeal for retail traders and smaller professional traders for whom the full-sized contract is simply too big to trade. Add to that the attraction of being able to trade the mini and full- sized contracts together or against each other, and you have a contract with all the elements lined up in its favor. The results speak for themselves. Both the E-Mini S&P and E-Mini Nasdaq 100 contracts traded on the CME have high- er contract volume than their full-sized counterparts, and other exchanges have created (or are in the process of creating) mini versions of some of their most active products. The CME, which celebrated the fifth anniversary of the E- Mini S&P contract in September, posted a series of record volume days over the course of the year in the mini-contracts. The success of the E-Mini contracts for the Mere can be attributed to a variety of factors, including sizing the contract just right for the retail investor, as well as utilizing the Globex electronic trading plat- form. Rick Redding, managing director of equity products for the CME, said the exchange decided to introduce the E-Mini S&P contract as a way to help keep retail and small institutions in the market. "The size of the S&P contract had got- ten very large," Redding says. "What we found was that it had gotten out of reach for a lot of the trading community. [Also,] five years ago we were really seeing the wave of people controlling their own trading decisions and trading electronically. So we wanted to bring in those traders we lost because of the large size of the S&P and that new group of users who were trading equities or other products electronically." From the start, the contract attracted smaller institutional traders such as small hedge funds, Commodity Trading Advisors (CTAs) and large individual traders. "We tried to export the liquidity from the large S&P contract to the E-Mini users," Redding says. "It brought in a lot of the high net-worth traders and it also brought in a lot of money managers." Size matters Some traders unfamiliar with futures in general, and mini contracts in particular, are under the mistaken impression these products have unique features that require special trading techniques. Mini contracts – although their details vary from exchange to exchange – are simply smaller versions of existing futures contracts. The E-Mini S&P contract , for example, is one-fifth the size of the full sized S&P 500 contract and has its own ticker symbol (ES, vs. the big contract’s SP). Like mist mini contracts, the S&P E-Mini is traded exclusively electronically, in this case on the CME’s Globex electronic trading system. The full sized S&P contract is traded on the exchange floor, by brokers and traders meeting face to face in the trading pit in an “open outcry” auction market. E-minis trade independently of their larger counterparts, but are settled at the same price each day. Discrepancies between the two markets can and do occur intraday, for various reasons: mistakenly keyed electronic orders, volume imbalances, and so on. However, these discrepancies are usually short lived, as the one-minute chart comparing the mini and big S&P futures contract shows. So what is the difference? As explained in “The futures advantage” and “Market mechanics” (active trader October and November 2002), form a strategic perspective – when to buy or sell, and why – trading futures is no difference than trading stocks, currencies or any other market. The attraction of futures for many traders is the opportunity to trade with less margin than stocks and the absence of short-selling restrictions. An added benefit of mini contracts for smaller traders is they provide access to markets such traders would otherwise be unable to trade without assuming an exceptionally high level of risk. For example, one full-sized S&P con- tract trading at 900.00 has a dollar value of $225,000 (index level times $250), minimum initial margin of approximate- ly $17,813 and a minimum tick value of $25. An E-Mini S&P contract trading at the same price has a dollar value of $45,000 (index level times $50), mini- mum initial margin of $3,563 and a minimum tick value of $12.50. The average daily range (high-low) of the S&P500 futures for the 60 days up to and including Sept. 16 was approximately 27 points, which, at $250 per full index point, means a single contract of the full-sized S&P carried an average maximum intraday risk of $6,750. The E- Mini S&P figure is $1,350. Also, some traders find the trading environment in the E-Mini contracts more favorable than that in comparable index-tracking stocks, or exchange-traded funds (ETFs) - SPY, QQQ DIA, et al. Jack Earnest, managing member of Velocity Futures LP in Houston, said he made the transition from being a stock day trader (trading the QQQ on Amex) to an E-Mini S&Pand E-Mini Nasdaq 100 trader two years ago. He trades approximately 1,000 E-Mini S&P contracts a day but has traded four times that amount. |
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