Currency traders now have the ability to trade in a regulated and secure Forex market via the Forex E-micro futures. Traded exclusively on the CME Globex electronic trading platform, Forex E-micros offer the security of centralized clearing and guaranteed counterparty credit at a manageable contract size. *

These new forex futures should appeal to retail fx traders, looking to trade a look-alike futures contract, and to retail futures traders, looking for currency contracts with a smaller risk/reward exposure.

The Bank for International Settlements (BIS) estimates that retail currency futures trading has a daily turnover of $65 billion. To appeal to retail traders already active in currency futures trading, CME Group executes these contracts electronically on Globex. And to appeal to traders accustomed to the nomenclature of over-the-counter (OTC) trading, the exchange quotes the micro-contracts in Interbank terms. This means that the euro, Pound and Australian dollar are quoted in American (direct) terms but the Yen, Swiss franc and Canadian dollar are quoted (and traded) in European (indirect) terms.

Because E-micro currencies are futures contracts, they employ leverage and it is possible to experience losses greater than the margin requirements. The effect of leverage is that even a relatively small price movement may result in immediate and substantial losses greater than the margin requirement including any fees and commissions.

Principle Features and Benefits

  • 1/10th the contract size of the regular CME currency futures contracts; hence 1/10th the margin requirement. *
  • Cash-settled. No risk of ever having to make or take physical delivery.
  • Settled nightly to the same settlement price as the regular-sized CME currency futures.
  • Interbank fx pricing and quotation protocol.
  • Transparency and Anonymity:
    • Everyone who trades at CME Group – from the largest financial institutions to active individual traders – has complete and equal access to the book of prices and trading opportunities.

The contracts’ small size offers traders accustomed to the larger standard-sized currency futures several innovative ways to incorporate these into trading plans.

1. Using E-Micro Futures to Build a Position
Both fundamental and technical traders look to an ever-changing list of news and price points which might validate a market position. The E-micro contracts allow a trader to initiate a position with a manageable risk/reward ratio and then continue to build the position as events unfold. Traders are nonetheless cautioned that despite low margin requirements, the levereaged nature of futures trading can cause losses in excess of the initial margin deposit.

For purely illustrative purposes, imagine a technical trader with a trading plan that calls for adding to a long position whenever the Euro closes 15 points higher than the opening price. With the micro-Euro having a contract size of 12,500 euros and a margin requirement of approximately $608, a trader can begin with a 1-contract micro position  and continue to increase the size of the overall position as the trading plan dictates. Since the micros are 1/10th the size of a full CME currency futures contract, the trader can in effect, build a position in increments of 10% of a full-sized contract.

2. Reducing Exposure to a Position
Imagine a trader short one regular-sized Swiss franc futures. The open position trade choice is very clear: Keep the entire position or liquidate the entire position. This is true whether the trader is looking to close out a currently profitable or unprofitable position. Every tick against the position increases the loss (or decreases the open-trade profit) by $12.50.

But what if the trader sought to reduce exposure and still maintain the short position? With micros, the trader can now reduce exposure in increments of 10% of the regular-sized contract.  And since CME clearinghouse recognizes a spread margin rate between the regular and micro currency contracts, the margin requirement would be reduced with every micro contract position which offsets against a regular size contract position.
NOTE: commissions and fees will affect the ultimate profit/loss of a closed out position.

3. Test a New System or Indicator in Real-Time
Paper (mock) trading has its place but it is never a substitute for establishing and liquidating in the real marketplace when it comes to establishing a track record or testing the efficiency of a trading system. Since the micos are likely to track the regular sized contracts closely (and settle identically), they provide a “live trading environment” in which to test new systems and indicators. The objective of testing a new system is to see how well it performs under various scenarios, such as percentage of winning vs losing trades, largest drawdowns, etc. Micro fx contracts can efficiently provide this kind of test data with real-world profits and losses in a live trading account, but at 1/10th the risk/reward of a regular sized contract.

*
Forex E-Micro Currencies Available for Trading and their Contract Sizes
E-micro Euro:                 12,500 euros
E-micro AUD:                10,000 AUD
E-micro Pound: 6,250 pounds
E-micro CAD:                $10,000
E-micro Yen:                  $10,000
E-micro Swiss:   $10,000