The E-Mini Currency Contracts

  • April 8, 2000
  • TradingMarkets Editors

Following on the wildly successful and popular E-mini S&P
500, the
Chicago Mercantile Exchange now offers E-mini contracts in selected currencies.
While these contracts lack the volume to daytrade, their smaller size makes them
a viable candidate for lower-risk, intermediate-term trading. 


Technology and legal changes have helped level the playing field in stocks.
The futures markets have been slower to respond. Answering the call for
electronically traded contracts, the Chicago Mercantile Exchange (CME) has
attempted to follow up on the success of the popular E-mini S&P 500 and
E-mini Nasdaq 100 futures contracts, by offering E-mini currency futures
contracts for the Japanese yen and Euro FX.


In January 2000, CME Chairman Scott Gordon commented
in a Wall Street Journal article on the rapid growth of E-mini futures
contracts: “The largest-growing, the fastest-growing segment of our business comes from
individual investors that are trading our E-mini products online. It’s by far
and away the largest growth area. So we’re doing all we can, we’re launching new
E-mini products.” The E-mini S&P is now the third-largest contract, in volume
terms, on the CME, trailing eurodollars and the big S&P contracts.

The
Chicago Mercantile Exchange launched the E-mini contracts for the Japanese yen
and Euro FX on Oct. 7, 1999. Like the more widely traded E-mini S&P and
E-mini Nasdaq contracts, the E-mini currency contracts offer faster order
execution and greater affordability.


Both the E-mini Euro FX and E-mini Japanese yen are one-half the size of the
regular contracts, and both contracts trade virtually around the clock on the
CME’s Globex2 electronic trading system.

At one-half the size of the
standard yen contract, the E-mini yen is valued at 6.25 million yen, and has a
minimum tick size of $6.25.  The E-mini Euro FX contract is sized at 62,500 euro
and also has a minimum tick size of $6.25. And similar to their bigger brethren,
both contracts are listed with two of four quarterly expirations in March, June,
September and December (H, M, U, Z). 


The symbol for the E-mini yen is “J7” and for the E-mini euro FX the symbol
is “E7.” Thus, the symbols for the current front-month contracts at the time of
writing (April 2000) is
(
J7M0 |
Quote |
Chart |
News |
PowerRating) and
(
E7M0 |
Quote |
Chart |
News |
PowerRating). 


With the E-mini contracts’ smaller size comes a lower margin. The initial
margin on the E-mini yen is $1418. For the E-mini euro FX, the initial margin is
$1,215. 


One of the key features of the mini currency contracts is that they are
traded virtually around-the-clock, from 3:15 PM Chicago time until 3:45 PM,
Monday thru Thursday. On Fridays, trading stops, as usual, at 3:15 and does not
resume again until Sunday at 5:30. This format more closely conforms with the
reality of the $1.5 trillion a day cash market which trades around the
clock. 


The CME makes the historical reference about currency futures contracts
pointing out that “the Japanese yen futures contract was one of five currency
contracts the CME launched in May 1972, making it among the very first financial
futures products in the world. The CME launched its Euro FX contract (the big
contract) at the beginning of 1999 in connection with the start of European
Economic and Monetary union.”


 Free real time quotes are available from thehref=”https://www.cme.com/web/live/”> Chicago Mercantile Exchange.


One problem with the E-mini currencies is a lack of volume. John Holden,
Director of Communications at the Chicago Mercantile Exchange said that volume
is currently about 1,000 contracts a month. Reflecting on the move to
electronically traded futures and the future of the smaller currency contracts,
Holden commented, “the e-mini products are drawing in a lot of retail business
that wasn’t there a few years ago. The stock market has seen a lot of volatility
recently and has drawn away a lot of attention. Once things return more to a
normal pattern, there’s probably going to be a lot more interest in currency
products.”


More broadly, Scott Brusso, Vice President of Currency Marketing at the CME
offered the following observation: “Overall currencies have been  good trending
markets. The minis track the big contract closely; they’re all derived off the
spot market plus the interest rate differential. The minis usually trade with
spreads about two to four ticks wide. It’s a new market for us but it has a good
opportunity for growth. Volume is currently not even 1% of its potential. There
were Y2K issues and it’s something that we’re developing slowly. It’s there,
it’s trading, there are people who have interest and yet at the same time, we
have time on our side so that we can nurture mini currency contracts along
slowly.”


Brusso added that the movements behind the currency markets are everything
from hedge funds and corporations doing business to central banks. For some body
starting out, you’ll want to acquire a good understanding of macro economics to
know what moves these markets and implement a good program of risk management.


Joe Skibinski, Currency Analyst at Lind-Waldock thinks E-mini contracts are
useful contracts if traded in the proper context. “If you have a longer-term
trading perspective, the small currency contracts are still viable. You just
have to be willing to accept a little extra slippage and work that into your
trading plan. If you want to be a daytrader in mini contracts–especially now
with the currencies so choppy and directionless, you’re going to get eaten alive
on the bid/offer if you’re in or out more than once a day. But if you’re looking
for a trade to take place over a couple weeks to a month, the mini contracts are
good. For one thing, you stand to make less, because they are one-half the size,
but at the same time you’re risking less, which buys you staying power, and it’s
the leverage which kills people in the futures markets.”


Commenting on the lack of volume Skibinski added,
“It’s a very thin market,
you’ve got a wide bid/offer, the liquidity is not great but at the same time you
can deal with it if you build it into the trading plan. If you’re looking to be
in and out a couple of times a day, it’s not going to work. If you’re looking
for a trade that you’re into for a couple of weeks, this is probably the route
to go. A 300-point wash-out will kill most retail accounts. If you take that
same 300 points and cut it in half with a mini contract, the guy at least has a
chance of sticking around for the correction.”