E-Minis Cause Some Major Worry

Twice this month, dramatic movements emanating from electronic stock-index futures rippled through pit-traded futures -- and cash markets as well. The damage in both instances was limited and relatively brief.

But questions linger about these separate cases of the tip of the tail wagging the proverbial dog and the possible effects of future episodes.

Because so much trading is computer generated -- program trading now regularly exceeds 40% of Big Board volume -- pessimists fret that future glitches in electronic futures could theoretically trigger a series of computer-generated sell orders. Those sales would send the market lower, trigger still more sell orders and devolve into a downward spiral.

Most observers dismiss such concerns, citing safeguards installed after the 1987 crash and the offsetting effects of multiple trading platforms.

"You have [participants in] option markets, cash markets and futures markets all constantly arbitraging against each other," said Russell Wasendorf, chief operating officer at Peregrine Financial, a Chicago-based futures brokerage. "You aren't dealing with a situation where one market -- cash or futures -- can be controlled by any one force or an exchange glitch or someone attempting to manipulate the market."

Recent episodes suggest Wasendorf is correct. However, perhaps he should have added "for very long" to the end of that statement. Both incidents in electronic futures did cause dramatic, albeit short-lived, price movements in broader markets. Furthermore, some traders fret these relatively new vehicles provide opportunity for manipulation, because of the relatively small dollar amounts needed to move them.

The Chicago Board of Trade's mini-sized Dow futures are half the size of the standard Dow futures contract while the Chicago Mercantile Exchange's E-Mini S&P 500 futures are one-fifth the size of the pit-traded S&P futures. Because of their small size, the electronic futures have become very popular with investors looking for relatively inexpensive ways to bet on the indices or hedge other positions.