Futures – Why?

Why Futures?
The simple answer is because I’m a futures trader. I trade futures!

A more considered answer may point to my origins as a trader with Bank America in 1983 where I was responsible for trading the 90-day Bank Bill futures.

Precedence has seen me remain with futures ever since.

In truth I suppose that is exactly how I became interested in, and traded futures.

However, as luck has it, I believe futures, in my opinion, are possibly the most superior instrument to actively trade for the active trader. I say this for the following reasons.


Great Liquidity
As the table below shows futures are traded in large numbers every day so they are very liquid.

Liquidity is numero uno for the active trader. It’s not so much about getting into a trade, it’s all about getting out when you want out! Liquidity is king and futures have plenty.

Take an index futures contract for example.

In Australia our sharemarket index futures contract is called the SPI200, or SPI for short.

I actually wrote a book called Trading The SPI (Wright/Wiley Books 2005).

As of writing, at close of trade, the SPI has recorded 40,000 contracts traded.

At the current level of 5736 that represents over AUD5.7 billion (5736 * AUD25 * 40,000) in liquidity.

Compare that with today’s top share traded by value, the ANZ bank, which only managed to trade AUD146 million in shares.

This makes the SPI futures contract the largest equity instrument by far traded in Australia and demonstrates the amount of liquidity it offers.

But the Australian index contract is peanuts compared to the E-MINI SP500 which averages around USD215 billion per day!

With futures, there is plenty of liquidity to allow the trader to freely enter and exit as they please with little slippage.


Less Manipulation Makes Futures a Fairer Market
Being so liquid, or so large, it’s almost impossible for any individual participant to unfairly dominate/influence/manipulate a market.

The same cannot be said for trading shares or CFDs.


Good Leverage
With futures a trader can take a position in a contract for a fraction of its value.

In the table above you can see a trader only needs a margin of less then USD7,000 to trade a single Euro Currency futures contract which has a face value of EUR125,000.

That represents a margin cost of roughly 5% or leverage of 17:1.

Futures allow traders to participate in markets with only a portion of the underlying contract face value, magnifying their returns on margin.

That’s the good news.

The bad news is that leverage is a two sided sword that can and does cut equally well both sides. So yes, leverage is good, but only if it’s managed and traded sensibility.

Please make yourself familiar with ROR.


No Ban on Short Selling
Futures allow traders to buy and sell.

The ability to both buy and sell is an intrinsic risk management feature required by fund managers and producers who are the main participants in futures trading.

To my knowledge no futures exchange has ever imposed a temporary ban on selling futures.

I can’t say the same for global sharemarkets.

Whenever sharemarkets are under pressure regulators are regularly known to suspend short-selling!

Do a Google search and you’ll see how often it happens.

Banning short-selling is like tying one hand behind your back.

Active traders like to trade both sides of the market, which futures allow, making them by far the superior trading instrument.


24-Hour Protection
Most stock exchanges are open only during their respective daily business hours leaving share traders exposed to volatile overnight moves.

Not so with futures.

Most futures exchanges allow traders multiple sessions (day and night) to trade their futures contracts. Multiple, or continuous sessions offers traders almost 24-hour non-stop protection which is essential to survive in trading.


Zero Counter-Party Risk
Futures are traded on a regulated exchange where a process called “novation” guarantees the outcome of every trade.

If you trade and win, you’ll be paid your profits.

If you trade and lose, you’ll have the loss deducted from your account.

The same cannot be said for shares and CFDs.

A dirty little secret of sharemarkets is the large number of company shares that go off the board due to bankruptcy or administration. The exchanges don’t promote it but just because a share is listed on a public exchange does not guarantee it will remain in existence!

CFD traders are reliant on the integrity of their CFD provider. Not only to provide a fair market place for two-way pricing, but to also pay out profits when they’re made and to remain solvent. Unfortunately there have been a number of CFD providers who have gone out of business during periods of financial panic.


Low Transaction Costs
Being very liquid and competitive futures brokerage is very low.

Let’s take my SPI example above.

At a closing price of 5871 one SPI contract is worth the equivalent of AUD146,775 (5871 x AUD25) worth of shares.

Futures brokerage to trade a single SPI contract could cost me AUD50 (to be conservative).

That represents a brokerage commission of 0.0003%.

If I wanted the same exposure purchasing physical shares and was being charged 0.5% it would cost me $733.88!

I know which brokerage I’d prefer to pay.


Good Research: Plenty of Historical Data
There are not too many companies that have been listed for say over 30 years on their respective exchanges. With futures there are plenty providing enough historical data for research and testing. Just as there is a clique in management that says if you can’t measure it you can’t manage it, the same goes with trading. If you can’t measure it you shouldn’t trade it. With futures you can do plenty of measuring!

So hands down, for the active trader, due to their;

– great liquidity,
– less manipulation,
– good leverage,
– no ban on short-selling,
– 24-hour protection,
– zero counter-party risk,
– low transaction costs and
– good research

futures, in my opinion, are the superior instrument for active trading.