There is a new game in town; The Small Exchange is bringing futures trading to the masses with smaller and simpler futures contracts with efficiency and leverage.
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According to The Small Exchange’s website, it offers the best of the stock and futures worlds in a single product. They claim to provide trading in products that pair the efficiency of futures with the simplicity of stocks. For that to be an accurate statement, we will need to see liquidity come into these products and their ties to the underlying assets must be proven but on the surface, I like what I see. The Small Exchange appears to be offering a bridge from stock trading into futures trading.
The products listed on The Small Exchange are futures contracts, but they are priced like stocks and represent indices like an ETF might. Instead of memorizing contract sizes and point values traders can calculate profit, loss, and risk in these futures the same way they do with stocks. All “smalls” move in 0.01 increments (a penny) that equals $1. Also, the “smalls” expiration dates are uniform. Unlike traditional commodity futures that expire based on industry cycles or because that is how it has always been done by their respective exchanges, all “smalls” futures contracts expire on the third Friday of the month. At any given time, only two contracts are being traded, the front month and the subsequent month. Thus, there is no opportunity to spread contracts with distant expirations (beyond a month), but for those looking for simple directional speculation, these products are attractive.
Traders participating in “smalls” futures trading are dealing in products that are cash-settled upon expiration. Although I’ve never been a fan of holding any position into cash settlement due to the arbitrary and random risk that comes with the settlement process, green traders might find solace in the idea that if they forget to roll a position they won’t be subject to the delivery process or waking up to the proverbial truckload of corn delivered to the front yard. Instead, their account will simply be adjusted to reflect the difference between the traders’ entry price and the final settlement price.
There are currently three listed and trading futures contracts on The Small Exchange:
• Small 30-year US Treasury Yield (S30Y) – Unlike the 30-year note futures trading on the CBOT division of the CME Group, The Small Exchange version of the product is priced in yield. This is intended to simplify the analysis and speculative process. The “smalls” 30-year note truly is a small-sized contract with a face value of just $3,900 if the yield is at 3.90%. To put this into perspective, the corresponding 2-year note futures value at the time was roughly $126,000.
• Small 10-year US Treasury Yield (S10Y) – Unlike the 2-year note futures trading on the CBOT division of the CME Group, The Small Exchange version of the product is priced in yield. This is intended to simplify the analysis and speculative process. The “smalls” 2-year note truly is a small-sized contract with a face value of just $4,900 if the yield is at 4.80%. To put this into perspective, the corresponding 2-year note futures value at the time was roughly $139,000.
• Small 2-year US Treasury Yield (S2Y) – Unlike the 10-year note futures trading on the CBOT division of the CME Group, The Small Exchange version of the product is priced in yield. This is intended to simplify the analysis and speculative process. The “smalls” 10-year note truly is a small-sized contract with a face value of just $800 if the yield is at 0.80%. To put this into perspective, the corresponding 10-year note futures value at the time was roughly $200,000.
In my view, the “smalls” characteristics make transitioning from stocks to futures a more comfortable endeavor. These products are a great way for traders to gain access to the efficiency of futures market pricing, the ability to buy or sell in any order, and access to leverage without the risk that comes with traditional futures trading. In other words, the small contract sizes and simplicity remove much of the risk and most of the mystery that has traditionally kept speculators out of the futures markets. On the flip side, as a Las Vegas local accustomed to 24-hour conveniences, it is disappointing to see the trading hours for these products are limited to 7 am to 4 pm Central but I suspect this could change as liquidity shows up.
