View from Crystal Bay: Moving Markets Forward with Micro Contracts

The futures industry historically served large users: big farmers, grain traders, food processing companies, energy companies, etc. They were mostly commodity producers or buyers hedging their exposure; investors and speculators played a small role in the market.

That started changing in the early 1970s with the launch of the International Monetary Market, a subsidiary of the Chicago Mercantile Exchange. IMM pioneered financial futures in the US, starting with interest rate futures (the Eurodollar contract) and currency futures. The turbulent 1970s provided a strong tailwind: the Bretton Woods fixed exchange rate regime collapsed in 1971, and interest rates went on a rollercoaster ride. Equity futures were launched in 1982. Within less than ten years, users of futures expanded beyond commodity players and into a wider group of financial investors who discovered that futures make great hedging instruments thanks to their liquidity and capital efficiency. Financial futures truly came into their own during the 1987 stock market crash: while stock trading halted and stockbrokers stopped answering their phones, futures trading continued in Chicago. Sustained buying by futures market makers marked the bottom of the crash. Chicago came to rescue New York.

Even as futures became mainstream financial instruments, smaller investors found it difficult to participate in the market. Contract sizes were designed to serve big customers. The original S&P 500 contract was sized at $250 per index point. With the S&P 500 index above 4,000, that makes each contract worth $1,000,000, which is impractically large for most people.

Futures exchanges responded by creating mini contracts. The S&P 500 E-mini, launched in 1997, is five times smaller than the full S&P 500 contract. The E-mini quickly captured market share and became the dominant contract (the original full-size contract will be delisted and cease trading in September 2021).

Even the mini contracts, however, continue to be too large for most individual investors. The E-mini S&P 500 future now has a notional value of more than $200,000. Futures exchanges are responding by launching a new generation of micro contracts. The micro E-mini S&P 500 future is ten times smaller than the E-mini, and with a $20,000 notional size, it is well within reach of individual investors. It was launched in May 2019, together with micro E-mini futures on Nasdaq 100, the Dow, and Russell 2000. All of these contracts are now highly liquid and easily traded.

The success of CME’s micro contracts didn’t go unnoticed. Its European competitor, Eurex, launched its own micro versions of German DAX and EuroStoxx 50 futures in April 2021. Bitcoin micro futures debuted in May 2021 and CME recently announced that it will be adding its first micro oil contract in July 2021. It seems that it’s raining micros!

The popularity of micro contracts is a great development that will make futures markets more accessible to regular investors. Let’s see more contracts shrink in size, and let’s make it easier for people to include futures in their portfolios. Futures markets should evolve and grow. There’s no need to be stuck in the past.

Last week’s continuing trends:

  • German Government Bonds
  • Italian Government Bonds
  • Cocoa
  • Soybean Oil
  • Indonesian Equities

Last week’s reversing trends:

  • Corn
  • Rice
  • Wheat
  • Oats
  • Taiwanese Equities