Regional to broad-based post-brexit bets on the eurozone

October 18, 2016 09:00 AM

We are coming up on the one-year anniversary of the mini-DAX contract launched by Eurex last October. The success of the DAX and more recently of the mini-DAX has been an interesting story. Back in the early 2000s the STOXX was commissioned to create tradeable futures and options contracts from its Stoxx 50 (largest 50 companies in the European Union, including the UK) and Euro Stoxx 50 (largest 50 companies in the Eurozone) indices. Then, when those contracts were eventually launched, promoted and volume grew, it was assumed by many in the trading community that those contracts would eventually supplant country specific indices such as the DAX 30, CAC 30 and even FTSE 100. 

After all, the launch loosely coincided with the emergence of the euro currency as not only a tradeable currency pair, but the actual legal tender of the Eurozone. While in some instances this has occurred--the Euro Stoxx 50 became the global benchmark for Eurozone stock and the DAX 30 has remained a viable trading instrument--and that resilience and persistence is what led Eurex to create a mini version for a broader group of traders to access it. And they have with impressive volume growth that appears to be organic and not simply a case of the mini cannibalizing the big contract (see “Organic growth” below).

 

The DAX had become somewhat of a cult favorite for U.S. traders who like to trade overnight, and for those who would use it as an indicator for the U.S. market open. Tom Busby, founder of DTI trading has been trading the DAX since 2001. 

“You get to see the world six hours earlier,” Busby says. “Around news events it is really helpful. The last Fed meeting it was easy to see they weren’t going to do anything with interest rates as the DAX started rallying several meetings before the announcement.”

 The one problem was that with the post credit crisis rally, the DAX had a notional value of greater than €300,000, making it too expensive for many retail traders to trade. So the mini, at one-fifth the size, allowed greater use and a greater ability to trade versus other contracts. 

The day we spoke, Busby noted that the mini-DAX foretold the large move in the S&P 500. “Today (Sept. 12), this big rally was telegraphed early this morning before we opened here in America.”

In addition to those benefits the mini-DAX has had some luck as well. Early in 2015 when the Swiss National Bank shocked the world by unpegging the Swiss franc from the euro, it led to a lot of stress in the Contract for Difference (CFD) market and brought more traders to the regulated futures market. As it turns out, it was just in time for many of them to take advantage of the mini-DAX. 

This summer’s Brexit vote created a lot of volatility in the EU and Eurozone and highlighted the need for instruments with different exposures around the EU. 

Also, as the 2008 credit crisis highlighted the risks in the so called PIIGS (Portugal, Italy, Ireland, Greece and Spain) it became abundantly clear that the Eurozone was not one happy family under a single currency but a hodgepodge of economies of different sizes and economic output. Germany specifically is much larger and has withstood the shock of the crisis much better than most. The ability to take a position on the German stock market as opposed to the Eurozone, or to hedge out German exposure from the rest of the Eurozone or vice-versa, is an important tool for traders. And they are using it as the mini-DAX traded more than 4.5 million contracts well before its one-year anniversary. 

The mini-DAX allows greater flexibility to do that and as the impact of the Brexit plays out over the next few years, the ability to create different exposures within the EU and Eurozone will become more important.

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