CME Group's E-micro Forex products allow individual traders to dip their feet into the $3.2 trillion in daily turnover foreign exchange market.
Sometimes it is a good thing to take a step down. CME Group hit it big in 1997 with its E-mini S&P 500 futures, opening the door to active individual traders around the globe and ushering in a host of new successful E-mini contracts at the exchange. In March 2009, CME Group again tapped into this market with the launch of E-micro Forex contracts, smaller-size foreign exchange (FX) futures that are drawing solid interest from individual traders.
"The FX market in general is gaining in popularity because customers are looking for alternatives to traditional stock trading," says Rick Leesley, vice president of the private client division for MF Global. "They tell us the currency markets are easy to understand and easy to trade."
E-micro Forex contracts have the potential to be a huge success, Leesley says, because they are quoted in the same terms as cash FX, which makes them simple for individual investors to comprehend. And trades are executed on the industry-leading CME Globex electronic trading platform. In the first six months since the launch of E-micro Forex, average daily volume has ranged between 6,000 to 10,000 contracts and open interest has been strong (See chart, right). Leesley says the biggest reason many MF Global customers switch from the cash market to exchange-traded is the security provided by the regulatory environment.
"The customer's funds are segregated from the brokerage firm's and they feel comfortable knowing the execution is done on a FIFO (first in, first out) basis, in a competitive market at the exchange," Leesley says. "Once they try the FX futures market, we find the customers quickly understand the benefits of exchange trading over the cash-trade FX market."
CME Group came up with the idea for E-micros after attending numerous trade shows and talking to active individual traders who liked FX futures, but found CME Group's standard-sized contracts too large for them. The result was that the exchange developed this suite of smaller contracts, which are roughly one-tenth the size of CME Group's standard contract.
E-micro Forex contracts cover the most actively traded currencies and include:
- E-micro AUD/USD
- E-micro EUR/USD
- E-micro GBP/USD
- E-micro USD/CAD
- E-micro USD/CHF
- E-micro USD/JPY
The new contracts complement CME Group's slate of 49 futures and 32 options contracts based on 20 currencies, says David Schulz, director of FX products, CME Group. E-micros' smaller size allows for better managed and affordable access to the market. The products also can be used to hedge a position in the over-the-counter market or may be combined with full-size products to make for a more specific-size position.
"Active individual traders can buy or sell an E-micro Forex contract and hold a position similar to a stock in their portfolio if they are taking a longer view on a particular currency, with one-tenth the exposure of CME Group's larger standard FX contracts," Schulz says.
Also worth noting is whether you are a "one-contract" trader or a large institutional trader, you "have equal access to trade on the same prices, as trade is done on a FIFO (first in, first out) basis," Schulz says. Market participants also can improve the bid or offer on CME Globex, whereas some platforms offer only a bid or offer, which forces traders to trade only on the price they display, he says.
Get educated
But where does one start? A retail trader must first get educated to successfully participate in the FX market, or any other market, says FX market expert Cornelius Luca, who teaches at New York University and has authored books on the subject of technical analysis.
Understanding technical analysis is even more important in the FX market than in other asset classes, says Luca, because the asset class is suited to this strategy more so than others. Understanding the differences between the FX contracts traded at CME Group and the cash market is also important. Trading FX products on an exchange allows for transparency. But in the spot/cash market, there is no way to measure volume in the marketplace. A futures exchange is the only place where traders would see inter-day gaps in prices from which one can profit, Luca notes.
Market followers also note that with the CME Group E-micro products an individual is trading in a market and not against a bank as is often the case in cash transactions.
CME Group resources for active individual traders include online classes, seminars and Webinars as well as trading manuals. Real-time price quotes are available through CME E-quivalents. The exchange also lists preferred brokers, including E*Trade, Advantage Futures, MF Global and Open E Cry, which act as educational partners.
Daniel Gramza, president and founder of Gramza Capital Management, also serves as an instructor and an online education resource for CME Group. He calls CME Group's E-micro Forex contract "brilliant" because it allows market participants to express their opinions about FX markets with a capital exposure that is far lower than with other FX futures contracts.
Gramza estimates that the majority of current market participants are using the smaller-size retail FX products, based on their interpretation of technical indicators.
"There is a growing awareness of FX in the retail trading community," he says.
Back to Summer 2009 Issue Home Download a full PDF version of this issue here.
