Some advantages and disadvantages of trading e-micro futures versus e-mini futures
Introduction
Trading the futures markets has become increasingly popular in recent years, as traders and investors seek to take advantage of the many benefits that these markets offer. Two very popular types of futures contracts traded electronically, and therefore over the Internet, are e-mini and e-micro futures. Both of these contract types offer similar benefits. Yet e-micro futures may offer a number of advantages over e-mini futures that make them a more attractive option for some traders, although one should be aware that they do have some drawbacks as well. In what follows, we discuss both pros and cons of trading e-micro futures compared to their older, more established siblings, e-mini futures.
For the sake of historical completeness, let us note that e-mini futures contracts were first introduced by the Chicago Mercantile Exchange (CME) in 1997. They are smaller versions of standard futures contracts that had been around for many decades before 1997. E-micro futures contracts were first introduced by the very same exchange in 2010. These are smaller versions of e-mini futures contracts. Both types of contracts are designed to make it more accessible for individual traders and smaller institutional investors to participate in futures trading and they are available for a variety of financial markets, including stock indices, currencies, and commodities.
The most popular e-micro futures contracts are those based on currency pairs such as the US dollar/euro and US dollar/Japanese yen, as well as contracts based on commodities such as gold and crude oil.
Advantages
Lower Capital Requirements
One of the main advantages of e-micro futures over e-mini futures is that they require significantly less capital to trade. E-mini contracts are typically valued at $50 per point, while e-micro contracts are valued at just $5 per point. This means that traders can enter and exit positions with much less capital, which can be especially beneficial for traders with smaller account sizes.
Lower Margin Requirements
In addition to requiring less capital, e-micro futures also have lower margin requirements compared to e-mini futures. This is due to the fact that the smaller contract size of e-micro futures reduces the risk of loss for traders. This allows traders to trade with more leverage and potentially generate larger returns on their capital.
Greater Flexibility in Position Sizing
Traders who are using e-micro futures contracts over e-mini futures can also benefit from greater flexibility in position sizing. The smaller contract size of e-micro futures allows traders to enter and exit positions with greater precision and control. This can be especially beneficial for traders who are looking to take advantage of short-term market movements or who are looking to fine-tune their risk management strategies.
Disdvantages
Lower Liquidity
E-mini futures contracts are more liquid than e-micro contracts. This is because e-micro futures have a smaller trading volume compared to e-mini futures, which means that there are fewer market participants involved in trading these contracts. As a result, e-micro futures often experience greater volatility and are less likely to be traded at fair market prices.
Less Tight Bid-Ask Spreads
Another advantage of e-mini futures over e-micro futures is that the former often have tighter bid-ask spreads. This is because e-micro futures have smaller trading volumes compared to e-mini futures, which in turn is the effect of fewer market participants involved in trading the e-micro contracts. As a result, the bid-ask spread is often narrower for e-mini contracts compared to e-micro ones, which can result in more favorable trade execution prices for e-mini futures traders.
Conclusion
In summary, e-micro futures offer some advantages over e-mini futures that make them a more attractive option for many traders. These advantages include lower capital requirements, lower margin requirements, and greater flexibility in position sizing. However, the e-mini futures contracts have tighter bid-ask spreads and greater liquidity, making them still a better trading vehicle for most futures traders. While both e-mini and e-micro futures offer somewhat similar benefits in some aspects, e-micro futures can sometimes be a more suitable option for traders, albeit primarily for those with smaller account sizes.
Posted on January 22nd, 2023.
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