During the heady days of the 1980s gold and share market booms brokers on the Sydney Futures Exchange did around two-thirds of their business with private clients placing orders at a modest couple of contracts a time.
This significant small trader interest that began with gold continued through the early days of the share price index (SPI) contract – the major futures innovation of the 1980s – which introduced them to the thrills of punting on broad moves in the share market.
Yet just prior to the 1987 share market crash, the SFE underwent a major transformation, converting from an exchange where private clients dominated to one where barely one in 20 contracts – or five per cent – was small trader-sourced. Things haven’t changed very much since and if anything the small trader profile has probably shrunk further, although there are no numbers available to confirm this.
In the interim, the warrants market emerged and prospered on the Australian Stock Exchange during the 1990s to satisfy the desires of derivatives traders. More recently the new decade has seen off-market traded contracts for difference capture the imagination of the trading community.
While all this has happened the futures market in Australia has still grown, especially its financial futures like 90-day bank bills and 3-year and 10-year treasury bonds, although not as a market for private traders. Whereas the SFE during the 1980s was easily able to identify private trader interest in its derivative offerings, no such information is available today. There are broad market statistics that rank 90-day bank bills as the sixth largest short term interest rate futures contract with turnover of 13 million contracts in the 2005-06 financial year. This was less than 3 per cent of the 447 million turnover of the Chicago Mercantile Exchange’s Eurodollar contract, the global leader. Over the same period, the 5.7 million contract turnover in the SFE’s SPI 200 contract ranked it as the 15th largest stock index futures contract globally, about 2.5 per cent of the CME’s E-Mini S&P 500 contract. Its contract turnover was just under 237 million.
The suggestion on how one might gauge retail trader interest in futures from the combined SFE-ASX – now known as the Australian Securities Exchange – was to ask brokers involved in this area. “The ASX is unable to comment on market sentiment or forecast the growth of futures trading,” was the official reaction.
So what did the brokers say? Most of the trading action in Australian sourced futures is by institutional investors, says MF Global futures adviser Daren Markisic. There are certainly private client Australian based futures traders but their business goes directly via brokers like MF Global into New York and Chicago futures markets.
Although there are some private client traders in the ASX’s SPI contract, says Craig Roberts of BrokerOne, the local scene is overwhelming driven by professional investors. Financial institutions and managed funds dominate the local futures business.
“As far as private traders are concerned, Australian-sourced futures are the forgotten derivatives,” says Simon McKeown of Sonray Capital Markets. While as a professional he trades SPI futures, he offers several reasons why they are being overlooked by private traders. To start with, there is a strong perception that CFDs can offer everything that futures offers, although he doesn’t necessarily agree with this. He concedes that it can take less money to get set in CFDs – the initial SPI futures margin deposit is currently $8,000 against an equivalent index CFD margin of about $1,700. This is potentially important for day traders on a limited budget and might be one reason why people prefer CFDs.
But for serious ongoing traders, says McKeown, futures have the edge over CFDs in that there are no financing fees, which can be a substantial expense.
The professionals also prefer futures for their tighter spreads, says MF Global’s Markisic, especially over market-maker quoted CFDs. That said, there are strategies emerging that combine futures and CFDs. These are being seen as a positive stgelopment for futures. It’s very possible that CFDs will act like a stepping stone into futures for traders who have moved from shares to CFDs, especially in the indices. “CFDs are not hindering futures, they are helping to create interest in them,” reckons Markisic.
Traders who take the trouble to understand how futures work will see some benefits in them. Sonray’s McKeown says there are some interesting pairs strategies that are starting to emerge that involve using SPI futures for one leg of a transaction and either overseas index futures or overseas index CFDs for the other.
It is often the case that different markets can look oversold or overbought compared to others, e.g. the ASX and Tokyo. Traders who study these correlations might sell the overbought market and buy the oversold. The absence of financing costs can lead to an attractive market-neutral strategy of selling index CFDs and receiving some interest on this position, and balancing this with a long futures position with no financing costs.