The Small Exchange Scores a First With Cannabis Equity Index Futures Contract

Photo for Small Exchange cannabis futures contract
Suzanne Cosgrove

Suzanne Cosgrove


The Small Exchange is known for its bite-size futures products aimed at retail customers, including the Small U.S. Dollar, Small Stocks 75 and Small Precious Metals contracts. Its latest product, which was launched on Monday, fits that bill, but Small Cannabis Equity Index futures also make their mark in another way — as the first cannabis-related futures to trade in the U.S.

“It’s pretty exciting,“ said Donnie Roberts, president and CEO of the Small Exchange, in an interview with JLN. Launching the futures contract before cannabis is federally legal in the U.S. is a “gutsy move,” he acknowledged, but he added that investor interest is there, especially since the cannabis sector has been outperforming the broader equity market.

“Right now is the time,” Roberts said. “It’s best to offer it now so people can hedge their risks going forward,” he said, noting growth of the industry and customer demand even without federally legal status.

According to researchers at Colorado-based BDSA, U.S. legal cannabis sales rose 46% from 2019 to 2020.

There’s also volatility in the sector, “so people need a hedge vehicle” for the underlying shares in the index, Roberts said. He hopes for interest from speculators as well as from long-term investors who are looking for exposure to the nascent cannabis sector.  The Small Exchange also plans to offer options on the contract, but no date has been set.

“Self-directed individual customers have been under-served for a long time,” Roberts said. “You have got to provide the access.” Two market makers will be in place at the launch of the contract, with a third also expected to be active, he said.

At a notional size of just under $1,200 at launch, one S420 contact, as the Small Exchange cannabis contract is known, is worth about 50 shares of individual stock, Roberts said. The Initial margin for the S420 contract is about $205 per futures contract; the maintenance margin is $185.

All 21 companies composing the underlying Small Cannabis Equity Index are “reflective of drivers of the industry,” Roberts said, and the stocks all are individually listed on the NYSE or Nasdaq.

According to the contract specifications published by the exchange, companies must have a market capitalization of $100 million or more, have an average daily notionally traded volume of at least $1 million and be publicly traded for a minimum of three months to be included in the Index. The index is rebalanced quarterly. Currently, the index includes industry names like Aurora Cannabis Inc. (ACB), Arena Pharmaceuticals Inc. (ARNA), Tilray Inc. (RLRY) and Village Farms International (VFF). 

As for possible competition for the S420 contract, the Montreal Exchange currently lists futures on the S&P/MX International Cannabis Index Futures (SMJ) and has listed options on cannabis companies since 2017.

Canada is a relatively small market when compared with the U.S., although cannabis has been legal throughout Canada since 2018. BDSA estimated that legal cannabis spending in Canada on adult-use and medical cannabis products totaled more than $2.6 billion in 2020, compared with U.S. legal adult-use and medical sales of $17.5 billion in 2020.

Roberts suggested that Montreal’s futures contract offers “collateral trade,” or arbitrage opportunities for liquidity providers and traders of the Small Exchange product, but there is a size differential. The S420 contract is about 1/10th the size — $1,200 versus a S&P/MX contract size of about $12,602 as of Friday’s close. 



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