From the February 01, 2008 issue of Futures Magazine • Subscribe!

The other side of midnight

Few careers offer as much flexibility as trading. With a computer and Internet access, trading is a mobile vocation. In fact, you can get on a virtual train and travel around the world electronically to trade foreign markets without stepping a foot out of your house or off of Main Street. Better yet, today’s trader can spend the day golfing and the night trading. Even holidays don’t require downtime for the global trader, if so desired. The opportunities are endless thanks to the spread of new, electronic market standards all over the world.

The ability to trade around the clock is a relatively new innovation. In 1987, the Chicago Mercantile Exchange (CME) proposed the concept of an after-hours trading platform, an electronic trading system for futures contracts. However, it took another five years before the ideas were transformed into reality.

Initially, the Globex terminal consisted of a large machine that came with an equally over-sized price tag. Only professionals or well-funded, serious traders were able to acquire the essential equipment. Over the last two decades, the technology has been refined and today it is available to the masses. Any trader with a computer and an Internet connection can travel via cyberspace around the world and trade foreign or domestic financial markets virtually any time he chooses.

Here, we’ll examine the possibilities available when the trading pits of the major exchanges are closed. Two subsequent articles will explain some specific strategies for trading after-hours.

WHAT’S OUT THERE

Many traders who take advantage of after-hours markets trade stock index futures. If you’re not yet aware of the risks inherent in these markets, you need to consider their unique properties before you go much further.

For one, a margin account is needed to trade futures. This means you can have less money in the account than the full nominal value of the product you are trading. Because of this, trading futures entails risks that other forms of trading may not. Therefore, before trading futures be sure the risks are understood and acceptable. Education is highly recommended, as well as preparation. Develop a workable strategy for trading a market before risking real money.

Futures allow a trader to buy and sell a wide variety of products including equity indexes like the S&P 500, Dow, and Nasdaq, foreign indexes like the Euro Stoxx 50, German Dax or Japanese Nikkei, currencies, precious metals, oil and energy, and bonds. Brokerage firms have proprietary or licensed and re-branded trading platforms that tie into these markets electronically (see “Getting in”).

The CME operates both live trading pits and an electronic trade-matching system. Some products are traded side-by-side. That is, during some times of the day, you may trade these products either electronically or via pits on the exchange floor. Other products are restricted to electronic trading. The E-mini S&P is one such product. Some other products still are traded exclusively in the after-hours market. For a partial list of what’s available on Globex, see “After-hours menu”.

Globex, operated by the CME, opens for after-hours trading each weekday afternoon at 3:30 p.m. CDT. Both the full-size S&P 500 futures contract and the E-mini S&P 500 futures contracts may be traded electronically on this system at night. Once the open outcry pits fire up in the morning, the big contract cannot be traded electronically and must be traded via the pit. The value of a big S&P contract is $250 per point. The value of an E-mini contract is $50 per point.

Nasdaq contracts, both big and mini also may be traded on Globex. A big Nasdaq 100 contract trades for $100 per point and a mini-Nasdaq trades for $20 per point.

Another highly developed after-hours index is the Chicago Board of Trade’s mini Dow contract, which will be listed on Globex by the time you read this as part of the CME/CBOT merger. A mini-Dow is worth $5 per point. Due to its small point value, the mini-Dow is a great product for beginners to learn the basics with while limiting monetary losses.

In addition to domestic products, such as the S&P 500 futures and Dow, after-hours market participants can trade an array of overseas products. One popular non-U.S. contract is the Dax futures. The original Dax futures are traded at the German exchange Eurex, as is the more liquid Euro Stoxx 50. You also can trade Nikkei futures, borne from Tokyo, or the Hang Seng, based in Hong Kong.

On weekdays, the Globex session runs from 3:30 p.m. until 3:15 p.m. the following day. On Sunday afternoons and many holidays, the session kicks off at 5 p.m. That means that the session operates continuously for almost 24 hours.

Within those time boundaries, traders can buy and sell without incurring additional margin requirements for holding positions beyond a single session. One workable policy is to liquidate all daily positions on or before 3:15 p.m. Then, re-enter the market when the new Globex session begins. Otherwise, a much larger margin requirement is mandated by the exchange for carrying a position the 15 minutes that constitute “over night” in this particular arena. Not only does Globex operate in the evening, but it also operates on many holidays. You can trade for at least part of the day during Thanksgiving and many other days when the trading pits are closed as the market for the following day opens that evening. Volume during holiday sessions tends to be thin, but trading may be quite profitable. As with any trading session, you need to get on the right side of the move. Trends tend to take on a life of their own during these holiday periods, perhaps because there’s sometimes little money pressuring the market back in the other direction.

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