Innovation is a key differentiator between traditional markets and futures markets. Exchanges, FCM, and industry personnel try to predict not only prices going forward but how people will trade in the decades to come. The CME, CBOE, and others demonstrate their desire to develop new ideas every year. Adding new contracts to include developing commodities, changing expiration schedules, and varying contract sizes contributes to the growth and flexibility that helps traders and investors navigate today’s challenging times while anticipating where the future of investing will go. Here are a few of the developing changes:
Micro Contracts
Inflation does more than impact our grocery bills. As the dollar and other currencies decline, the value of the S&P, commodities, and digital assets soar as investors look for refuge. This is good for portfolios but poses a dilemma for trading. Five years ago, the S&P traded in the 3200 range. Recently, it traded at 6000, almost 100% higher. The value of a single point is the same as always at $50. A 1% move is still a reasonably calm day in relative terms, but it increased the point value move from 32 to 60, a difference between $1600 then to $3000 now. Gold, which moves at $100 per point, spiked similarly from $1540 to $2700. To put it simply, the risk-reward setup is different. This poses a dilemma as a system stop losses might be set at 1% of a trade level but that move now takes half as much effort for the market to reach.
Historically, a CTA would just work with the options available, but the introduction of micro contracts, which trade at smaller increments, is helping. The S&P Micro E-Mini futures contract trades at just a $5 increment (1/10th of the E-Mini size). The E-Mini was launched in 1997 to complement the larger contract, which moved at $250 a point. With over 1.5 million contracts exchanged daily, the E-mini is now the most liquid contract in the world. The Micro contract is already trading with a quarter of the volume of its older sibling. In time, it is possible it will replace the E-Mini just as happened previously with the larger contract. The Chicago Mercantile Exchange has led the way in introducing these new products, which include micro contracts for gold, oil, Bitcoin, US equity indices, and more.
Perpetual Futures
A key attribute of the futures market is the concept of delivery. Beginning with agricultural futures, one could go long a bushel of corn, and upon expiration, they could take possession of said bushel. The farmer or grain merchant on the other side of the trade would deliver it. The introduction of financial futures changed this construct, as one cannot “deliver” the S&P. Now, when that contract ends, both parties will get paid/or debited the value of their position in cash. Different end dates can be aligned with growing seasons, hedging needs, or business cycles. BitMEX, a cryptocurrency exchange, introduced a new idea in 2016: a futures contract that never expires. This allowed someone to track the Bitcoin price entirely through this contract for as long as they wanted to hold it. While this concept is normal in other investing circles, it is new to futures trading.
Advantages of the new product include simplicity for investors who do not need to remember to roll their positions, higher liquidity due to a single shared contract, and options to holding a traditional investment long-term. Importantly, they can also benefit from the industry’s margin characteristics, which require less funding per contract than a full Bitcoin, which is currently valued at $92k per coin. Long-term holders would incur fewer trading costs by keeping the same positions for months or years. This could appeal to smaller companies who want to hedge risks but not hire sophisticated trading teams and others entering a new market that works like others they know well.
Additional Growth Areas
Additional areas for growth include materials for batteries like the Abaxx Nickel Sulphate Futures contract, newly introduced digital assets through Binance, and options on volatility futures. We covered the CBOE mini-VIX product in detail in November 2023. Massive leverage is offered for many of the Binance contracts up to 75x. This might make sense for now as they try to get volume to new coins, including Griffain, AI16Z, Zerebro, and Fartcoin (not a typo). I expect consolidation in this space eventually, but AI drives new ideas and takes advantage of investors’ demand to bet on the next cryptocurrency. Hashkey Global Exchange is experimenting with isolated margin futures. This would allow specific margin to be set aside for some positions but not others. This might be helpful as investors segregate their risk into aggressive and conservative buckets within the same account. Expect more trading resources provided with artificial intelligence to retail investors as the technology becomes ubiquitous.
One consequence of innovation is that many of these new ideas might not succeed, but many will. By listening to their customers and trying to solve their pain points, options for growth continue to be endless. While combining the Commodities Futures Trading Commission (CFTC) and the Securities and Exchange Commission (SEC) is a dream of many regulators, the rapid pace at which concepts become reality in the former is reason enough to keep it apart from the latter. Competition forces evolution, which is why we already see fractional ownership of shares taking hold on the equity side, which is similar to Micro contracts. The futures market will continue to lead, which is great news for our investors. It will be interesting to see where it goes next.