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Wall Street News

CME Pitches Futures Trading to Small Investors

January 30, 2017

Disregard the fact that the CFTC, which regulates futures, discourages individuals from trading them.

 

Have you caught the new TV ad from the CME Group? The one showing a cheerful dad touting futures as he strolls past a crude-oil pipeline and gold vault that have materialized in his house. The message: At-home investors can use futures and bet on different markets 24 hours a day.

 

The Chicago-based exchange operator started airing the TV commercial in November - an attempt to quash the reputation of futures trading as a risky endeavor best left for the pros.

 

Never mind the fact that the CFTC, which regulates futures, discourages individuals from trading them. And don’t even think of looking at the CFTC website page that describes trading futures as a "volatile, complex and risky venture that is rarely suitable for individual investors or ‘retail customers’.”

 

CME says its campaign is aimed at financially sophisticated, well-funded individuals who are already active traders of stocks, options or ETF’s. And besides, its markets are highly regulated and its retail campaign isn’t hiding any risks.

 

ATTRACTIVE AND PERILOUS NATURE OF FUTURES TRADING. LEVERAGE. Yes, because it allows heavy use of leverage, investors can make large bets with a small amount of money – and, in turn, generate eye-popping profits. However, a trader stuck with a losing bet could lose more that his/her original investment.

 

  • In stock trades, retail investors are generally limited to borrowing no more than 50% of the value of their stock portfolios, a 2 to 1 leverage.
  • Futures can offer leverage of 10 to 1, 20 to 1, or more - depending on which contract is being traded and the requirements of the broker that a trader is using.

 

Another thing is that futures markets are dominated by professional traders, commodities firms and financial institutions. Retail makes up a small but growing slice of the pie – between 5% and 10% of CME’s trading volume. comes from retail customers, a percentage that has roughly doubled since 2012. So, with the CME in search of new ways to grow, the relatively untapped retail segment would appear to be a likely and attractive target.

 

Craig Pirrong, a finance professor at the University of Houston who studies commodities trading, expressed surprised at the new ad campaign: “I haven’t seen anything like it before coming from a futures exchange.”

 

Sure, but the country is in store for a lot of new and unusual things and experiences in 2017 and beyond.  It’s a brave new world (and world order).