As we are building a retail-focused futures brokerage, we know our product offering has to resonate with active traders. Every day we face business decisions that may impact our future customers.
As a part of the building process, I’ll be sharing in these monthly posts the rationale behind those decisions. My goal in these posts is to show you some of the inner workings of the industry, and how and why we put customers first in making these decisions. Along the way, if you want to comment, provide counterpoints, or have questions, I encourage you to go for it.
When we launch later this year, it will be exclusively CME Group futures products for several reasons: reputation, a long history of stability, reliability, and innovation; a diverse product range; global access; liquidity; costs; and ease of access/accessibility. Eventually, we will connect to other markets but we are starting with the largest futures exchange in the world.
Reputation
By choosing CME Group futures products, traders gain access to a marketplace characterized by stability and reliability. The exchange’s long-standing presence, combined with its cutting-edge trading platforms and rigorous risk management practices, provides traders with the confidence to execute their trades seamlessly.
CME Group’s dedication to innovation has been a key driver of its success. The exchange has consistently embraced cutting-edge technology to enhance its trading infrastructure and introduce new products that meet the evolving needs of market participants. From the development of electronic trading platforms, to the launch of innovative financial instruments, to its transformational agreement with Google[1], CME Group has remained at the forefront of the derivatives industry.
Moreover, CME Group’s commitment to integrity is unwavering. The exchange adheres to high ethical standards and maintains a robust regulatory framework to ensure fair and transparent trading practices. Its commitment to market surveillance and compliance safeguards the interests of all participants, fostering a level playing field for all traders.
Product Range & Liquidity
CME Group offers a wide range of futures products (from full-size to micro) in markets from traditional commodities like agriculturals, oil, and precious metals to financial futures like equity indices, interest rates, and foreign exchange.
Not only does the CME offer a wide variety of products, but the markets they offer are liquid, and available 23 hours per day, five and half days per week.
For retail traders, a wide range of products and liquidity at nearly all hours is crucial because diversification allows traders to customize and personalize their trading experiences to accommodate their particular strengths.
Diversification also allows traders to spread their trades across different asset classes, and potentially reduce their exposure if one asset class isn’t performing as indicated. A broad range of products also provides ample opportunities to take advantage of changing market conditions.
Deep liquidity also means that contracts can be bought and sold without causing significant price changes and to quickly capitalize on market movements, reduce risk, or close out gains and losses.
Finally, a liquid market reduces costs because it leads to tighter bid-ask spreads, which lowers the transaction costs for all traders, and leads to more accurate and fair pricing of products, as more participation drives market transparency.
Global Access
Remote market participants have been trading CME Group products since phone lines were installed on the trading floor. However, it wasn’t until 1984 when the predecessor to SGX agreed to mutually offset Eurodollar futures transacted on each other’s trading floors that CME became a truly global exchange.
Today, the CME Group maintains a truly global presence, with offices on every continent except for the really cold one, Antarctica:
Americas: Chicago (Global headquarters), New York, Houston, Calgary, Mexico City, São Paulo, Washington DC
Europe, Middle East, and Africa (EMEA): London, Amsterdam, Belfast, Luxembourg, Paris, Zurich
Asia Pacific: Bangalore, Beijing, Hong Kong, Seoul, Singapore, Sydney, Tokyo
For retail traders, a global presence is important because it increases visibility to the markets they participate in, which helps increase liquidity.
Additionally, global accessibility drives innovation and adaptation, which leads to market and product growth.
Costs
Keeping trading costs low is a key metric for successful retail traders, no matter the time horizon or the percentage return target of each trade.
As a trading venue, CME Group is structured to help traders keep their costs in line, with a retail pricing structure for both exchange fees and market data.
Taking exchange fees first, as they affect each transaction, if you consider exchange fees as a percentage of the notional value of the contract (which in itself is a reflection of the leverage offered by exchange-traded futures), they represent a small percentage of the transaction.
Let’s walk through an example: The CME exchange fee per contract of a micro E-mini S&P 500 future (MES) is $.35[2] per contract. So to buy and sell one contract will cost a retail trader $.70 in exchange fees.
The notional value of one micro E-mini S&P 500 future is roughly $26,000 ($5 * S&P500 index).
So to control $26K in notional value of the index it will cost a trader $.70 in exchange fees. This represents just .0027% of the notional value.
Let’s not forget that while the notional value of 1 MES is $26K, the exchange initial margin for that contract is $1298, which is what a trader would need to have in their trading account to keep the contract overnight (intraday margin rates are generally lower but vary too much by broker to be super specific on this point, and the overnight rate still supports the argument very well).
So to go long (or short), hold the contract overnight, and liquidate it the next day, it will cost the trader $.70 in exchange fees and $1300 held in a trading account.
To transact a similar notional value ($26K) in leveraged ETFs (using the SPDN ETF as an example), it will cost a net expense ratio of .45%[3] and require an account balance in excess of $26,000.
In this example, the cost of capital alone ($1300 versus $26,000) justifies the $.70 exchange fee, where a margin loan at a 10% rate will cost ~$.27 per $1000 borrowed per day (or ~$7 per day using the $26,000 example).
From a market data perspective, the non-pro level 1 and level 2 fees charged by CME Group (~4.50/month for level 1 data for all four exchanges or ~$35 per month for level 2 data) is commiserate with level 2 equity market data charges.
Ease of Access/Accessibility
Finally, for retail traders, it’s not enough to be diverse, liquid, available, and cost-effective – markets have to be accessible as well.
Accessibility in this case is two-fold – traders need to be able to physically access the markets in a variety of ways, and the markets listed need to be easily relatable and understood by a wide variety of participants.
In both cases, CME Group hits the target.
Between brokers and market data vendors, there are over 600 separate participants listed on the CME’s website as offering trading access and/or market data for CME’s product suite, from nearly all regions of the globe, and all sectors of the financial and commodity markets.
Finally, regarding relatability, CME Group does an outstanding job making their contracts easily understood and making futures markets as a whole easier to grasp.
They accomplish this in several ways.
First and foremost, the contracts listed (particularly in the micro suite) are easy to understand – from indices on the S&P 500, the Dow Jones, and Nasdaq to futures on gold, silver, crude oil, and corn – and trade.
The indices are priced at a specific multiplier times the underlying index, while the commodities are priced per bushel, ounce, or barrel.
Some contract expiries are difficult to understand because they are based on historical crop and market cycles (which is why corn trades in March, May, July, September, and December, for example), the financials generally expire quarterly and are financially settled, which means you don’t have to worry about a boxcar full of soybeans being delivered to your home.
The CME Group also provides tools and resources that make the industry relatable.
On their website, the Insights section provides economic analysis, research, and commentary for all the markets the CME offers, and the education section breaks down futures and options materials into bite-size sections to make learning approachable.
The education section also does an excellent job of grouping their content into lessons, so the learner can feel a sense of accomplishment for completing a group of sections around a specific topic.
Finally, the CME provides tools and resources used outside the industry but with the goal of drawing more interest in the space. Of specific help is the CME FedWatch tool, which extrapolates daily fed fund futures trading into a chart that predicts the probability of future interest rate moves by the Fed. Not everyone knows what a fed fund future is, but everyone can immediately understand a chart that indicates a 91% chance the Fed will leave interest rates alone in June.
A Package Optimized for Retail
Taken together, CME Group’s product range, the depth of liquidity available throughout that range, the global reach of the exchange and the global nature of its products combined with a cost-effective pricing model and the easy accessibility of its contracts, make the CME Group a natural starting off point for retail traders with any level of experience.
And here at MetroTrade, that’s why we did that.