DOW FUTURES...CBOT Finally Get it Right
It took parts of three decades, maybe four, for the Chicago Board of Trade to finally get the futures contracts on the Dow Jones Industrial Average right. The launch of the electronically traded $5 multiple Dow futures last Friday, along side the pit traded $10 Dow and $2 electronic Dow finally gives the CBOT the right product mix in the right market environment.
It took overcoming long ago institutional stupidity by the CBOT and Dow Jones and overcoming the resultant long drawn out lawsuit with Dow Jones, Inc. for the CBOT to get here. But I believe they finally have it right.
When the CBOT secured the rights to the Dow contracts, it launched the DJIA futures with a pit-traded contract in head to head competition with the Chicago Mercantile Exchange’s then new emini S&P contract. The electronically traded emini S&P contract, smaller in value than the $10 Dow, was a bigger hit because it solved two big problems. The Dow contract only solved one.
The popular S&P 500 contract traded in the pit had become too large for many retail traders to trade due to its volatility and the roaring bull markets that had inflated stock prices.
The electronically traded emini S&P also offered increased efficiency and surety to traders. No longer did retail traders need to wait with white knuckles for a floor broker to report an order filled or not. The emini S&P fills were right there in the broker’s TOPS printer or on the Globex screens for the brokers to report in split seconds.
But then it got even better. Online trading came along. Because the Globex system was opened up with the development of the ORAPI Application Programming Interface (API), front end trading screens could be developed to interface with Globex and the open outcry markets through the TOPS order routing system. Additionally, a window of opportunity had opened up for a more dynamic API to Globex as well, though less than a handful of firms were able to complete work by the deadline. It was awhile before new APIs would be offered and new rules would allow non-members to see the depth of the market on the Globex markets. But these improvements leveled the playing field even more and attracted even more new traders to the emini contracts.
These first retail oriented online futures trading platforms, working in conjunction with the widely distributed broker TOPS screens, gave retail traders increased control. With the electronically traded emini S&P contract retail futures traders for the first time could cancel and replace orders to their heart’s content. If they were trading online, there was no longer a broker, phone clerk or pit broker to anger by their constant changes in their orders. And when the online emini S&P trader wanted to cancel an order, they nearly instantly knew they were cancelled and confirmed out.
The pit-traded Dow contract, although aided by the use of Electronic Clerk terminals on the trading floor, could not match the speed, surety and freedom to cancel replace of the emini S&P.
Another factor that aided the emini S&P contract was the fact that the S&P 500 contract had been the favorite U.S. stock index to trade for years, something the Dow contract could have been had the then much better known Dow Jones licensed the DJIA contract to the CBOT rather than litigated with them so many years before. This happened so long ago that I was skinny then. It was that long ago.
The CBOT’s late attempt to build an equity-trading complex, through the introduction of a DJIA knockoff, the Major Market Index, never could match the growing popularity of the S&P 500 contract at the CME. And the CBOT would even launch a Nasdaq contract at one point, only to have it fizzle.
The S&P 500 was then and is now the king of the hill, with one advantage for the emini S&P being that many technical traders had huge archives of S&P price data to test mechanical systems. The start up Dow contract enjoyed no such advantage at the start of its competition with the emini S&P.
But now lots of data is available on the Dow futures. And the CBOT is offering free real-time quotes on its Dow products on the www.cbot.com web site, including bid, offer and bid and offer size. And the CBOT is offering a contract of comparable full face value to the emini S&P in the $5 Dow. And the $5 Dow is traded electronically, on the dependable a/c/e matching engine. And the a/c/e matching engine is accessible on more front end trading platforms than ever before. And the trading platforms and the service is better than back in the early years of the emini S&P. And commission prices are lower now, giving extra benefits for the active online trader.
Additionally, index trading is in vogue and surging in popularity. The imploding prices and bankruptcies of key highly traded company’s stocks of the late bull market has encouraged a migration of former individual stock traders into the futures arena. Regulatory reasons are also pushing some stock day traders into futures to seek additional leverage without triggering SEC regulatory thresholds. These traders are finding they like the similarities to Level II stock trading in futures with the electronic contracts trading through the latest APIs and trading platforms. They like the level playing field of the electronic futures matching engines and the straight through processing of their accounts.
Thus, the $5 electronically traded Dow contract is the right contract, on the right platform, at the right time. The $2 electronically traded Dow provides the CBOT with the entry-level contract for the new traders, small traders and hedgers, with a built in slightly imbalanced synergistic relationship between the $2 and the $5 Dows. Additionally, there is synergy between the electronically traded Dows and pit traded $10 Dow deep in face-to-face market maker participation.
And the EMM, Electronic Market Maker program ties all the Dow products together and more.
The CBOT may be borrowing a chapter from the CME’s game plan, trying to recreate the delicate ecosystem between the pit traded larger Dow and the electronically traded smaller Dows like that of the S&P 50 and its emini version. But they will also be writing some of their own chapters on how to do it right, because after all this time, they finally have it right.
As my father always says, “if it is worth doing, it is worth doing right.” Funny, I didn’t know the CBOT leaders even knew my father. But they ARE finally doing it right.
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From the John Lothian Newsletter
4-8-02 |
