How E-mini S&P 500 Revolutionized Equity, Electronic Trading

At a Glance

  • In 1992, the E-mini opened up trading to a new breed of of online trader, paving the way for electronic futures markets.

As the most liquid contract at the world’s leading futures exchange, the E-mini S&P 500 stock index future trades more than $200 billion notional value daily and has eight times the trading volume of the top three S&P 500 exchange-traded funds combined.

“The Best Contract Ever Made”

But when it debuted in 1997, it’s unlikely the contract’s creators had any idea this miniature version of the standard S&P 500 stock index futures contract would revolutionize both equity and electronic trading. After all, the E-mini contract was a direct response to the Chicago Board of Trade landing the license to create a futures contract based on Dow Jones Index, a contract geared to retail traders.

It was considered a major coup for the CBOT at the time. Alan Bush, senior financial economist, ADM Investor Services, recalled the rivalry between the two exchanges was fierce, and initially there was disappointment the CME did not land the Dow contract, especially since it had the license for the S&P 500 for years.

But early on the E-mini S&P showed why it would eventually become to so popular.

“The E-minis were the best contract ever made. The reason why they were so successful is that there was a natural arb,” says Charlie Nedoss, senior market strategist, LaSalle Futures, who was also in the industry at the contract’s debut.

That “natural arb” was that the E-mini S&P was one-fifth the size of the standard S&P contract, meaning traders could combine five E-mini contracts to equal one standard S&P contract or divide one standard contract into five E-minis.

Revolutionary for Retail

Prior to the E-mini’s creation, futures contracts were mostly for professional traders or commercial users who could afford the margin requirements.

The timing was auspicious, too. During the E-mini’s 1997 debut, the bull market at the time increased the S&Ps value, which was larger than what some traders would have liked, Bush said.

“The E-minis filled that void with the one-fifth size. You didn’t have to trade the big contract if you didn’t want that much risk. It was a way to increase volume, keep smaller traders in the market and not force them into a contract that might be too big for them,” Bush said.

Jeff Malec, managing director and partner, RCM Alternatives, attributed the E-mini’s success not only to its size, but that it was the first electronically traded product at the CME and an equity contract.

“(It opened) up futures to a new breed of online retail traders, who might not know the first thing about corn yields, but watched the stock market fluctuate around every day,” he says.

Bush says the E-mini’s success showed that it was possible to have a purely screen-traded product, since at the time pit trading dominated.

“It was the test to proceed with other markets to go electronic. It used to be we had side-by-side markets, where there was pit and electronic trading at the same time,” Bush says.

The E-mini S&P’s success paved the way for E-mini versions of all of the CME Group’s contracts, not just equities, and the popularity of the idea was adopted by other futures exchanges over the years.

Reaching Traders Around The Globe

Richard Co, executive director, equity products at CME Group, said in addition to opening futures trading to retail traders, it also opened markets globally since all-electronic markets are traded 24 hours during the work week.

“It is effectively a continuous market for almost five straight days. With the advent of E-mini futures, you had a tool to rely on for the entire week,” Co said. “All of the equity markets are correlated to a certain extent – Hong Kong, Japan, the UK, the U.S. Why should you have to wait for markets to open?”

Co said adding retail traders to the exchange’s mix of market participants helps with liquidity.

“We always want to have a very diverse set of participants. The more diverse set of participants, the more robust trade,” he says.

A Mix of Traders

The contract’s size appeals to retail traders, but Co said they’re not the only ones in the market, as seen by the CFTC’s Commitments of Traders data, which show a mix of asset managers, dealers/intermediaries and leverage accounts using the E-mini S&P.

Malec said the E-mini contracts in general appealed to a host of traders.

“Traders big and small eventually flocked to E-minis for numerous reasons, including better granularity for their speculation and hedging, faster fills it was – electronic so no need to wait on a call back –  and the ability to trade it via the screen. There are now dozens of ‘mini’ contracts at the various exchanges, although the E-mini S&P remains the largest by far.”

 

Debbie Carlson has focused on commodities for much of her writing career. She spent more than a decade at Dow Jones covering the Chicago-based futures exchanges. As a Dow Jones editor, she worked closely with The Wall Street Journal and Barron's in planning commodities coverage.

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