FIA Expo: How Small Can You Go?

Sarah Rudolph

Sarah Rudolph

Editor-in-Chief

Mini and micro futures contracts at various exchanges have been gaining a lot of traction lately, presumably because of the “Robinhood effect” of retail traders coming into the markets. Our own John Lothian led a panel at FIA Expo-V Thursday titled “How Small Can You Go?” (an ironic title for a John Lothian-led panel, since anyone who has met John knows he cannot go small at all). 

Panelist Tom Sosnoff, founder of Tastytrade, explained the success of the smaller futures contracts by saying that “regardless of age and size of trading account, people are getting smart about capital efficiency. Retail brokerage firms are seeing a continued migration to more capital efficient markets, and futures and options are always more capital efficient than stocks.”

Lothian asked why the panelists thought people at Expo were saying again and again that futures are not for retail clients, while the micro futures are clearly designed with retail investors in mind.

“People say [trading futures] is difficult because it’s complicated, the tick sizes are off,” said Lynette Lim, CEO of Phillip Capital. “But it’s cheaper to trade in many ways, and more efficient. The volatility is great.”

Sosnoff was more direct. “Anyone who thinks futures, options, and futures options are not for retail traders in 2020 is not clear of the concept,” he said. “We’ve come a long way from being passive investors. A lot of new futures investors move from stocks to options and then from options to futures and futures options.”

JJ Kinahan of TD Ameritrade put it most bluntly. “Anyone making that statement is really stuck in the dark ages,” he said. “The quality of education today is amazing. Traders today want to use capital more efficiently, and they are starting to get familiar with futures, or starting to realize they’re already familiar with futures.”

Lothian asked about the April move to negative oil prices and its impact on retail trading.

CQG Product Manager Kevin Darby acknowledged that “it hurts. Usually I can only lose the money I have, but futures are a levered vehicle. I think some of the moves by FCMs to make customers whole helped. But mostly it hurt retail adoption.”

Sosnoff said the negative oil prices were “a bit of a black mark,” but that at firms like his and Kinahan’s, who deal only with retail traders, customers are able to roll their positions on the roll date and are not allowed to trade in the front month contract. He also said the event was “an outlier – you see it once every 50 or 100 years. I see it almost as a non-event.”

Lim said only one of her customers had a problem as a result of the negative oil price. “We make sure we test for everything, including negative prices.”  But, she added, “I think the world is going to negative prices. Interest rates are also going negative.”

Lothian asked how big a role lower commissions played in the popularity of micro and mini futures contracts. 

“I think the commissions for the futures side have not really gone down compared to the stock side,” Lim said. “Commissions in futures trading were already low, but not zero.”

She added that she did not think commissions would go to zero for futures. “In the equity world, brokers can get payment for order flow, but if futures go to zero commission, brokers like us would have to ask exchanges for rebates.”

Other reasons for the success of mini contracts include the presence of market makers and the ability to adjust options positions more precisely using micros. 

“Being able to do a smaller contract in options is nice for retail investors who want to get started but are nervous with the bigger product,” said Kinahan. “Our trading is still primarily the S&P 500 and Nasdaq, but we’ve also seen a lot of interest in Russell micro products in the past few weeks.”

Also playing a part was the COVID-19 pandemic: people are stuck at home with nothing to do, a situation which is ripe for retail trading.

The panelists said they weren’t seeing a lot of interest from U.S. retail traders in foreign contracts, however. 

“We don’t really have foreign contracts and haven’t seen much demand,” said Kinahan. “There is a whole new level of complexity with that, as well as currency risk.”

Lim agreed that there were complications with overseas trading. “There are a lot of things to think about – currency exposure, timing. Whatever is volatile or big, though, people will trade it. I see traders moving to Hong Kong because they see a lot of opportunities there.”

Technology must evolve to keep pace with retail traders, Darby said. Technology requirements increase as the appetite for more retail trading increases. “We’ll see more pure volatility plays,” he said. “You can hedge a 30 delta mini option with micro futures. That was impossible before.”

Kinahan said, “We’ve been working on the technology for years. We think we’re ready for anything on the product side. What people want more and more are two things: trade ideas and ways to measure risk better. As we add more strikes and expirations, the challenge is how to keep a clean interface and not be overwhelming.”

Sosnoff added, “Customers also want speed and stability. We are making sure we’re stable and very fast. Our current focus is on speed and stability first and adding features second.”

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