Beginning Monday, May 14, the InterContinental Exchange (ICE) will provide futures and options contracts for corn, wheat, soybeans, soybean meal, and soybean oil, as announced on April 12. All five contracts will be settled daily to the equivalent Chicago Board of Trade (CBOT) prices, with cash settlement rather than physical delivery being used for final settlement. Trading hours will be from 8 p.m. Sunday to 6 p.m. Friday, which is significantly longer than the existing CBOT trading hours of 6:00 p.m. to 7:15 a.m. and 9:30 a.m. to 1:15 p.m.
ELX Futures (ELX), which launched for business in July 2009, was rumored to be aiming to introduce its own suite of agricultural contracts less than three weeks later. The ELX has five interest rate contracts that compete with the CBOT’s Treasury-based contracts: 2-, 5-, and 10-Year Treasury Notes, as well as 30-Year and Ultra Treasury Bonds. ELX also offers a Eurodollar contract that competes with the Chicago Mercantile Exchange’s flagship interest rate contract (CME).
What exactly is going on here? Is there a likelihood for any of these new contracts to succeed? What does this entail for farmers and other players in the market?
Operating a futures exchange has become a fiercely competitive industry, with exchanges all over the world looking for new ways to increase volume. ICE and CME Collection the parent company for CME and CBOT, as well as NYMEX (New York Mercantile Exchange) and COMEX (Commodity Exchange) are both publicly traded, for-profit organizations; ELX is a privately held enterprise controlled by a group of investment banks, trading firms, and technology providers. Unlike the old days of member-owned exchanges, today’s exchanges are primarily controlled by shareholders who expect these companies to not only generate a profit, but to grow that profit year after year.
The majority of an exchange’s revenue comes from various trading-related fees. As a result, profits are inextricably related to an exchange’s overall trading volume, which can only be boosted in a few ways:
Each of these approaches has its own set of difficulties. For example, it is difficult to find a consistent supply of new users for the CBOT corn contract, which has been active for over a century and a half. Similarly, existing corn contract users are only likely to generate a small amount of new trading activity. Hedgers are likely already using the optimal quantity of futures contracts, and speculators are motivated by lucrative trading opportunities and market movements over which the exchange has little control. Although establishing new futures contracts appears to be a viable source of future development, it is a costly and time-consuming operation with a high failure rate. According to a recent survey by Futures and Options World, 52 percent of the 584 new contracts launched around the world in 2011 failed to trade even once. Most of the remaining 48 percent, according to history, will see very little trade activity before eventually disappearing.
The final strategy of increasing volume is to grab contracts and customers from other exchanges, which takes us to the recent happenings. Simply put, convincing clients to switch their business from an established and actively-trading contract is exceedingly difficult for a second (or possibly third) exchange to introduce a competitive futures contract. Liquidity, for hedgers and speculators alike, takes precedence over all other indicators of market success. Because liquidity tends to concentrate in a single contract, the first exchange to develop a liquid contract often controls the market for that commodity going forward. This helps to explain why for most commodities, there is only one futures contract.
Over the years, there have been numerous instances where market players had compelling reasons to switch to a competing exchange. Traders rarely followed through on these reasons, which ranged from market disruptions at the leading exchange to lower trading expenses at the alternative exchange. In reality, just one documented incidence of a successful contract switching from one exchange to another has been documented. Trading in the Bund (German government bond) contract shifted from London’s LIFFE exchange to the EUREX exchange outside of Frankfurt in 1998. This migration was backed by the German government and German banks, who were determined to bring the Bund contract back to its “home” market, which explains why it was so successful.
The experience of ELX in attempting to gain a piece of the CBOT and CME interest rate business is more typical. ELX has competed on trading expenses, charging only 18 cents per round-turn per contract versus $1.12 at CBOT and $2.38 at CME. In the interest rate futures area, ELX has unable to make a dent after over two years of battling against CBOT and nearly a year versus CME. In April 2012, the ELX traded only 15,564 interest rate futures, compared to approximately 40 million on the CBOT and nearly 33 million on the CME. The Minneapolis Grain Exchange (MGE) has had similar success in its efforts to establish cash-settled corn, soybean, and wheat contracts in the agricultural markets.
Finally, what does all of this activity imply for users of the market? Consumers gain from competition, and prior exchange competitions have resulted in cheaper trading prices, improved customer service, and updated contract specifications. In this situation, the CBOT said that, starting later this month, it would raise its trading hours to 22 hours per day to match the ICE trading hours. While a longer trading day may not be appealing to US growers and handlers, it does recognize the worldwide nature of the grain and oilseed markets. Anything that makes it easier for foreign firms to participate in these markets would improve the price discovery function of futures and options, which benefits everyone.
Is it possible for me to trade multiple futures contracts?
One of the best features of the futures market is the enormous leverage offered to traders, which allows even individuals with tiny accounts to start trading with a single Emini contract while without taking on too much risk overall. Although higher leverage can be a double-edged sword for traders, boosting possible profits while also raising the danger of loss, with a proper plan and a specified maximum risk, it can be a highly valuable tool.
We can trade intra-day (meaning no trades remain open at the conclusion of each trading day) with as little as $500 per contract on margin thanks to the tremendous leverage offered in futures. Margin is essentially the collateral that your broker uses to allow you to acquire control of a futures transaction. With a $2,500 account, a trader may theoretically trade up to 5 contracts ($500 margin each), but this would expose the trader to a significant level of risk. To take use of leverage, we must first determine our overall risk on every particular transaction and then manage our positions accordingly.
More experienced traders may take on more risk, but a trader would rarely want to take on more than a 2% overall chance of loss on any given trade. Experienced traders will tell you that risk management is an important element of their trading strategy. Novice traders generally focus on how much profit they can make, but experienced traders will tell you that risk management is an important component of their trading strategy. Keep your risk minimal by sizing your positions appropriately in relation to your account size, and you’ll be able to fully benefit from the leverage offered to futures traders.
Is it possible for me to trade multiple Emini contracts?
You can theoretically trade as many E-mini contracts as your account balance permits. You can trade more contracts with less money because E-mini contracts are traded on margin ($500/contract). If you have $3,500 in your account, you could theoretically trade seven contracts ($500 multiplied by seven = $3,500). However, we would advise against doing so because you would be putting yourself in grave danger.
Is it possible to buy fewer than one futures contract?
- A futures contract is a financial derivative that locks in today’s price for an underlying asset that will be delivered later.
- These contracts are marginable, which means that a trader just needs to put up a part of the trade’s total notional value, known as the initial margin.
- If the price of the underlying declines, the trader will need to put up additional money (known as maintenance margin) to keep the deal open.
How do you figure out how many futures contracts you’ll need?
How many contracts should you buy to construct your position based on the information you have? Use the following formula: Position size = maximum risk in dollars (trade risk in ticks x tick value). 2 contracts = $100 / (4 x $12.50).
Can you trade futures many times per day?
From 6:00 p.m. EST on Sunday to 5:00 p.m. EST on Friday, futures markets are open nearly 24 hours a day, six days a week. Futures traders have more time to trade than stock and ETF traders, who only have a 6.5-hour trading session 5 days a week. Futures traders now have more trading flexibility and the ability to manage their positions at practically any time of day.
E-mini and Micro E-mini futures allow equities index traders to trade in the same markets as Wall Street both before and after the stock market’s relatively short trading period. Index traders can take advantage of events like earnings releases that occur outside of normal stock market trading hours more successfully.
Is it possible to sell futures on the same day?
The method of buying and selling a futures contract on the same day without maintaining open long or short positions overnight is referred to as day trading. The duration of day transactions varies. They can last a few minutes or the entirety of a trading session.
Is it possible to trade futures without using margin?
Although you must have enough in your account to cover all day trading margins and variations that come from your positions, there is no legal minimum balance you must maintain to day trade futures. The day trading margins differ from broker to broker.
What are E-mini micro futures?
What exactly are they? Micro E-mini Futures are miniature copies of the CME Group’s popular E-mini stock index futures contracts, measuring barely a tenth of the size. Because traditional E-minis had grown too expensive for many traders, the CME Group introduced them to allow them access to the liquid futures market. The smaller Micro contracts also give traders more freedom and allow them to control their risks more precisely.
How do you make money using futures?
Futures are traded on margin, with investors paying as little as ten percent of the contract’s value to possess it and control the right to sell it until it expires. Profits are magnified by margins, but they also allow you to gamble money you can’t afford to lose. It’s important to remember that trading on margin entails a unique set of risks. Choose contracts that expire after the period in which you estimate prices to peak. If you buy a March futures contract in January but don’t expect the commodity to achieve its peak value until April, the contract is worthless. Even if April futures aren’t available, a May contract is preferable because you can sell it before it expires while still waiting for the commodity’s price to climb.