Don't Skirt These E-MiNY Futures Contracts

Electronic mini contracts, or fractional versions of bigger contracts that trade on an exchange, have been among the most successful futures contracts in derivatives history, gaining rapidly in terms of acceptance and volume.

Consider the E-mini S&P 500 contract traded on the Globex electronic platform through the Chicago Mercantile Exchange. When the contract started trading in 1997, daily volume was only about 9,000 contracts. Since then, volume has grown steadily and averaged 300,000 contracts a day in the second quarter of 2002.

Lower capital requirements (margins), near-instantaneous electronic trade executions, ease of shorting (no uptick required), virtual around-the-clock trading access, tight spreads (generally one tick in the E-mini S&Ps), declining commission costs and the ability to see the order book are among the factors accounting for the rapid growth of the contract. (If you are unfamiliar with the E-mini index products and would like more information, you can go to the CME's Web site and click on the "Daytrading the E-minis" tab for more information).

Other futures exchanges have taken notice and have launched their own mini contracts. The Chicago Board of Trade, for example, now has E-mini Dow contracts -- in $2 and $5 tick increments -- that are gaining in popularity and which recently exceeded daily volume of 9,000 contracts. The CBOT has a suite of other mini contracts. Some, such as the E-mini Dow futures, trade on the CME's electronic Alliance/CBOT/Eurex, or a/c/e, platform.

The New York Board of Trade also launched a Mini Coffee "C" futures contract this year. But like some of the CBOT's other mini products, Mini Coffee "C" orders are not executed via an electronic trading platform and matching engine. Instead, orders are electronically routed to the pit where they are still filled through open outcry.

MiNYs

The New York Mercantile Exchange is next in line to launch mini-sized futures contracts. This Monday, June 17, the Nymex is slated to begin trading two new electronic products. The contracts are called light sweet crude oil e-miNY and natural gas e-miNY energy futures. Nymex had teamed with the CME on this product launch. Contracts will trade on the CME's Globex electronic trading platform, and the trades will still clear through Nymex.

Like all minis, the e-miNY energy futures are smaller versions of bigger contracts. Both crude oil and natural gas e-miNYs will be 40% of the size of the contracts that trade in the pits on the floor of the Nymex. Hence, the size ratio is 2.5 e-miNYs to one standard-sized contract. Globex trading will be virtually around the clock -- 22 hours a day -- Sunday evening through Thursday, Eastern Standard Time. For the exact contract specifications, visit the Web sites for the Nymex or the CME.

The allocation of up to 60 e-miNY floor trading rights will create arbitrage opportunities for Nymex members that will keep the pricing of the e-miNYs in line with the standard-sized contracts.

The most exciting aspect about the new energy contracts is the potential for rapid order execution and confirmations. Clicking a buy or sell button and receiving an electronic confirmation within seconds is, of course, a lot faster than dialing a futures broker, speaking your order, having it repeated back to you and then waiting for a return call to get your order-fill confirmation, all of which is the standard process in most New York futures markets.

High volume and tight spreads will ultimately determine the success of the e-miNY energy futures. But if the E-mini S&Ps traded on Globex are an indication, the new Nymex products could rapidly gain in popularity and make trading energy futures accessible to a broader range of traders.

Trading Setups

It's not the most popular trading idea with everyone fretting about a weakening dollar. But the most heavily weighted currency on the dollar index -- the euro -- appears to be having difficulty rising above resistance. The September euro FX (ECU2:CME) has been hammered every time it's approached the .9450 area. Looking at the hourly chart, the ECU2 has failed to break above .9445 on four tries. If the contract fails to break out above .9445 on its fourth try, look for a downside correction to .9345.

The September Swiss franc (SFU2:CME) and Japanese yen (JYU2:CME) have also shown signs of an intermediate-term top, all of which could help September dollar-index futures (DXU2:NYBOT) defend support in the 110 to 111 area.

September coffee (KCU2:NYBOT) is scraping the bottom of the kettle here, and stealthily closed at a three-month low. As I pointed out in a recent article, a government program to limit supply in what is forecast to be a bumper crop year in Brazil is unlikely to work, and coffee prices should remain under pressure.

There is one seasonal caveat to this trade idea, though. The beginning of the frost season in Brazil -- the most volatile period for coffee -- is keeping traders from getting aggressively short, but at least one meteorological service in that country is claiming there is virtually no chance of frost in the next week to 10 days. If the forecast proves correct, it would leave Brazil with only one month of the worst part of the frost season left, taking away most of the upside volatility risk.

Corn didn't react much to Wednesday's announcement by the U.S. Department of Agriculture that it was trimming its acres planted and yield estimates. Technically, September corn (CU2:CBOT) has recently overbalanced to the upside, breaking above trendline resistance. A proposal to use more ethanol passed the Senate recently and is en route to the House of Representatives for approval. Passage of a bill mandating ethanol usage could provide a psychological boost to this year's corn prices, although any bill's ultimate impact would be greater in coming years.

Making its biggest move in two weeks, July cotton (CTN2:NYBOT) exploded out of the low volatility and pullback situation described on June 11. Cotton is now trading at a two-month high.