While you may be aware that futures contracts describe an agreement to buy and sell a specific security at a predetermined price and time, did you know that such agreements are typically quite large?
However, we’ve seen an increased demand for smaller-sized futures contracts during the digital age, with this driven by the global nature of the financial market and the emergence of retail traders in various markets.
This has resulted in the arrival of new micro futures contracts, but what exactly are they and what do they mean for investors?
What are Micro Futures Contracts?
Numerous exchanges and derivatives arms have responded to the rising demand for smaller futures, including Deutsche Borse and Eurex.
In fact, the latter has moved particularly quickly by launching a series of micro futures based on European benchmark indices, including SMI European, EURO STOXX 50 and Germany’s DAX 30.
These contracts began trading on April 19th, in order to meet the demand for smaller sized futures directly and ensure that individual retail investors are able to access transparent, price efficient and ultimately liquid markets.
You’ll be able to trade futures of this type through a licensed brokerage site, while Eurex executive board member Randolf Roth says that the new contracts will be ideal for private wealth managers and part-time traders.
In addition to being the optimal size and scope for this type of independent retail investor, the new micro futures contracts will appeal to institutional and professional investors who are looking to scale their index exposure in a particular market.
More specifically, they’ll provide an opportunity to hedge existing equity portfolio positions, which may be particularly appealing in a strained economic climate.
What are the Benefits for Traders?
According to analysis, the micro contracts retain a value that’s equivalent to the current index level, while they’ll range from £3,500 to £14,500. These values contrast sharply with standard-sized futures, which typically range from £35,000 and £360,000 and typically cover a period of up to three months.
This highlights their relative accessibility to small scale investors, while this has been helped further by the fact that several trading platforms and venues have already launched similar mini or micro initiatives during the Q1 of 2021.
In addition to increased accessibility, the new futures contracts will also offer significant benefits from the perspective of cost-effectiveness.
This will create contracts and wider portfolios that are far easier for retail investors to manage, increasing efficiency further and potentially lowering the costs associated with trading stocks and similar securities.
It’s also thought that the new micro futures will empower investors who want to execute small-cap options-based strategies, which has historically been a challenging goal to realise.