The DeCarley Perspective...
Trade Smalls Futures with DeCarley Trading
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.
DeCarley Trading is proud to offer clients access to the "smalls" products, if you would like to trade these contracts please complete an account application; start here.
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.
Another convenient aspect of futures listed on The Small Exchange is the built-in diversification. Like an ETF in which stock traders can speculate on a basket of assets or a sector, the “smalls” are written with an index as the underlying. For instance, the Small Precious Metal contracts “combines and weights the three most popular metals by global production, US consumption, and trade volume”; at the time I was writing this a single futures contract represented 0.024 ounces of gold, 0.963 ounces of silver, and 0.0051 ounces of Platinum. This equated to roughly 69% gold, 24% silver, and 7% platinum.
There are currently three listed and trading futures contracts on The Small Exchange with two more on the way. Here is a look at available and upcoming products:
• Small Stocks 75 (SM75) – An index of the most active stocks from the five major sectors (technology, industrial, energy, financial, material). The index, comprised of 75 stocks in five equally weighted sectors with each containing 15 stocks, adjusts and shifts with the market. The contract size is 100 multiplied by the index price, so at 50.00 it represents $5,000 worth of stock. The margin required to trade the product is $495.
• Small US Dollar (SFX) – This index spreads US dollar exposure across the Euro, Chinese Renminbi, Japanese Yen, British Pound, Canadian Dollar, Australian Dollar, and Mexican Peso. Like all other “smalls” the contract size is 100 x the index value; thus, if the price of this contract is 150.00 the futures contract represents $15,000 worth of currency. The allocation is updated annually but is the larger components are the Euro at 33.9% of the index and the Chinese Renminbi accounting for 21.3%, the smallest allocation of 3.8% goes to the Mexican Peso. The margin required to hold this position is $159.00.
• Small Precious Metals (SPRE) – An index blending gold, silver, and platinum (as specified in the text above), this index is worth about $6,300 if the futures price is at 63.00. The margin to hold this contract is $225.
Upcoming Smalls Futures Contracts -
• Small 10-year US Treasury Yield (S10Y) – 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 $139,000.
• Small Global Oil (SMGO) – Perhaps the most exciting product traded on The Small Exchange will be the oil contract. Unlike traditional oil futures which have two separate markets for WTI and Brent crude oil, the “smalls” version will blend multiple crude oil benchmarks into a single index that “reduces exposure to a specific geography and represents a greater world of crude”. With a contract size of 100 x the contract value, each SMGO futures represents about $3,900 worth of oil if the contract is at $39.00.
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.
