Derivatives exchanges are rolling out smaller-sized versions of existing contracts to appeal to the rising number of retail investors interested in trading futures. The launch of micro bitcoin futures by exchange giant CME Group on May 3 is the latest proof of this trend, and a sign derivatives markets are evolving to efficiently and effectively serve this growing cohort of investors.
CME has reported that it took just three weeks for its new Micro Bitcoin Futures (MBT) to tally more than 650,000 contracts traded in the first month since launch.
The exchange’s legacy Bitcoin Futures (BTC) that launched in 2017 are sized at five bitcoin per contract unit. With the cryptocurrency currently trading north of $30,000, that can make this product impractical for small-sized investors. In contrast, the new Micro Bitcoin futures are sized at just one tenth of a single bitcoin. Additionally, MBT is cash-settled, meaning retail traders don't have to worry about taking delivery of actual bitcoin or maintaining a digital wallet.
"At one-fiftieth the size of our larger Bitcoin futures, this new, smaller contract allows traders of all sizes to better manage their bitcoin price risk in an efficient, cost-effective way," said Tim McCourt, global head of equity index and alternative investment products at CME.
Interactive Brokers began offering CME’s larger BTC product as soon as it was listed. Steve Sanders, executive vice president of marketing and product development at Interactive Brokers, said that his firm's trading platform has seen "consistent growth" in the intervening years, and that the debut of Micro Bitcoin Futures was a logical next step.
However, Sanders said IB does not presently allow direct investment into cryptocurrencies. That’s also true of other brokers including eTrade and TD Ameritrade that began to offer CME’s new micro bitcoin futures in May as part of an approach to digital assets that relies on futures and options over direct exposure.
Sanders said when compared with legacy BTC trading, Interactive Brokers is seeing roughly "double the trades and triple the contracts." He also added that about 65% of traded contracts come from outside the US, showing truly global demand for these "micro" products.
Separately, TD Ameritrade told MarketVoice that it has seen a "continued increase in volume and open interest especially through the overnight session," also hinting at strong international participation.
Accessible, small-sized contracts have popped up in recent years but are hardly a new innovation. In fact, CME was one of the first to be a part of this trend with its successful "e-mini" futures contract on the S&P 500 index way back in 1997. But the trend has intensified over the last two years. CME introduced micro versions of four major stock index futures in May 2019, and Eurex, the largest futures exchange in Europe, launched micro versions of its two most heavily traded equity index futures in April 2021. New exchanges have also emerged that are aiming directly at appealing to retail investors.
In June 2020, the Small Exchange opened its doors with the stated goal of primarily serving retail traders rather than institutional investors through educational resources and cost-effective contracts. It currently offers "Smalls" on US Treasuries, FX, equity indexes and commodity futures products. The Small Exchange also plans to launch digital asset products in the near future.
Small Exchange CEO Donnie Roberts said his experiences at equity options platform Thinkorswim in the 2000s proved the power of building "sustainable customers" through offering products and services tailor-made for retail investors, such as small-sized contracts.
"Size sometimes makes people zero sum traders," Roberts said. "It's all about lowering the barrier to entry to ensure continued participation and liquidity in our markets."
As further proof that futures markets are thinking small, on May 26 a brand new CFTC-regulated futures exchange called FairX announced it was open for business with a goal of providing "smaller, simpler, more accessible futures for active individual investors."
Some of FairX’s financial backers include derivatives market participants TD Ameritrade and Virtu Financial along with venture capital firms Hyde Park Venture Partners and Battery Ventures.
Roberts said he applauds the success of CME's micro bitcoin futures, the recent debut of FairX and other developments as proof that futures markets are thinking seriously about previously underserved retail investors right now.
"Sure, there's competition. But it's also a validation of the market opportunity," he said. "Competition just means it's a good idea and there's a lot of potential."
- Digital Assets