|
PureBytes Links
Trading Reference Links
|
The CBOT is stepping up to borrow a page from the CME playbook with the
introduction of the $5 electronically traded Dow contract, while the CME has
is writing new chapters with plans to have all its contracts trade
electronically in one form or another by the end of this year. However, the
CBOT is throwing a bone to the traders and brokers in the Dow pit by
canceling the side by side trading of the $10 Dow contract and trying to put
the genie back in the bottle by eliminating the electronically traded $10 Dow
during open outcry hours.
How is that for mixing too many metaphors in a lead?
The introduction of the $5 Dow contract provides the CBOT the cover to
discontinue the side-by-side $10 Dow trading and only offer the $10 contract
via open outcry from 7:20 AM to 3:15 PM every business day. This will be a
shot in the arm for the open outcry trading pit trading the $10 Dow and give
the public a choice of a $5 Dow electronically or a $10 Dow in the pit. One
(trading the $5 Dow on a/c/e) offers greater price transparency, but also
greater fees for comparable contract values. The other offers you greater
fee efficiency for a larger contract size, but traded in the pit.
The CBOT would seemly be hoping to create the type of synergy that the CME
has between the S&P 500 pit-traded contract and the smaller Globex traded
emini S&P contract with this new market structure. They announced a market
maker program for the $5 Dow contract and some arbitrage program between the
pit and electronic traded contracts to help jump-start that synergistic
relationship.
When the $2 Dow contract was launched I wrote it was too small and the CBOT
should have offered a $5 contract instead. While I am glad to see them
launch the $5 contract, I must admit that I was wrong about the $2 contract.
I like its size and have found use for it in my dealings with customers. It
is ideal for scaling into and out of positions and putting a position on in a
high-risk environment when you want to be able to give the contract more room
to swing.
One interesting element of the $2 contract is that because of its more modest
size, it is has more utility for a larger group of traders and investors.
While futures trading is not appropriate for all people, the $2 Dow contract
is appropriate for a much larger group of potential traders and investors
than many of their higher dollar indices cousins. The $2 Dow has legitimate
hedging use for many stock market investors, both on the short and the long
side.
Given the interest in trading indices that we have seen, the menu of Dow
contracts that the CBOT will be offering starting April 5 should offer broad
appeal to the indices traders and those migrating to indices from trading
individual shares. And this should be a boost to Single Stock Futures
trading as well once that begins. The more traders that are attracted to
futures because of innovative new indices products, then the more they will
feel comfortable with trading individual shares as futures contracts.
My one concern about the CBOT’s new Dow slate is them canceling the side by
side trading of the $10 Dow contract. While I understand the political
popularity of such a move among pit traders, and the desire to recreate the
success the CME is having with a similar structure, I am not sure the recipe
works the same if you put the ingredients in to the mix in a different order.
And I am not sure the ingredients are really the same, as there are some
different traders and magnitudes of trading in the Big S&P and the $10 Dow
contract.
Surely there is support for the CME to list the big S&P contract side by side
with the pit. However, there is a more compelling argument to not fix
something that is not broken. The introduction of a fourth variable to the
balance between the pit traded big S&P, the electronically traded emini S&P
and the pit-traded options could harm the current synergy and ecosystem.
The CBOT is hoping to recreate the CME environment with a much smaller sized
$10 Dow contract that does not have the magnitude of institutional volume of
the big S&P. The Dow pit does have liquidity because of the CBOT local
trader presence, but that liquidity could be quickly marginalized if the new
$5 Dow contract can attract enough public trader attention. It is much more
likely the CBOT will see growth in the Dow contracts from the retail sector,
while this new plan does nothing to help attract more institutional volume to
the pit. Thus, taking away the a/c/e $10 Dow contract from side by side
trading poses a risk of disaffecting some of those same retail traders.
The CBOT may have been better off including the $10 electronic version as
well and have been at the next chapter compared to the CME. Thus, the CBOT
plays follow the leader with the CME, which is smart given the success of the
CME with this formula. But they could have played leader, which could have
proved smarter. But then I have been wrong before.
Regards,
John J. Lothian
President
Electronic Trading Division
The Price Futures Group, Inc.
Disclaimer: This letter is strictly the opinion of its writer, and not
necessarily those of The Price Group and its management, and is intended
solely for informative purposes and is not to be construed, under any
circumstances, by implication or otherwise, as an offer to sell or a
solicitation to buy or trade in any commodities or securities herein named.
Information is obtained from sources believed to be reliable, but is in no
way guaranteed. No guarantee of any kind is implied or possible where
projections of future conditions are attempted.
Futures and options trading involves risk. Past results are no indication of
future performance.
|