The Key to a Successful Futures Contract

Over the last 180 years, thousands of futures contracts have been introduced by exchanges around the globe. While many fail, there are a few that become blockbusters. Like many other ventures in business, the majority either see limited success or fail. For example, 3M company has introduced various new products during its life, but only a select few have enjoyed the success of Post-it Notes or Scotch Tape.

CME Group is no different. We have launched products that traded little to no volume in their first few months, but every once in a while, we see a blockbuster product like Eurodollar futures or S&P 500 futures, which trade millions of contracts each day with extraordinary liquidity.

What differentiates success from failure in futures contracts? Is there something that can help predict success? If you examine our huge successes, you see a few things in common. If one or more of these key ingredients are lacking, chances for success are sub-optimal.

• Large underlying cash market  –  The S&P 500 cash market exceeds $25 trillion dollars. The 3- month LIBOR market (which Eurodollar futures is based on) is gigantic, as is the Treasury bond/note market. Thus, it is no surprise that futures contracts based on these markets are blockbusters.
• Presence of large numbers of speculators  – Speculators provide core liquidity by trading and trading frequently. It is nearly impossible to have a liquid and successful market without individuals willing to take risk.
• The presence of hedgers – Speculators take risk, hedgers want to reduce or control risk. The whole function of exchanges and futures products is for risk transference. Speculators and hedgers often (but not always) take the opposite side of one another’s trades.
• The presence of arbitrageurs and spreaders –  Again these traders play a different kind of strategy. Arbs and spreaders try to profit from price discrepancies in various markets.

It is possible for a futures contract to be a hit without some of these, but when you look at contracts with less volume and activity, it is because they lack most of these ingredients. On the other hand, the successful contracts like Eurodollars, Crude Oil, Gold, Stock Indexes and others have all four attributes.