Retail futures: Trading is trending

November 28, 2016 01:00 PM
Futures markets have changed immensely during the last 10 years.

Futures markets have changed immensely during the last 10 years. The change is mostly due to electronic trading, which gives traders the ability to trade the E-mini S&P 500, crude oil, gold and more, side by side to equity products like Apple (AAPL) and Google (GOOG) by simply moving a mouse. In the past, many people heard the term futures, and thought of institutional traders, pit traders in bright jackets and professional hedgers. Retail traders, who had not grown up in the futures space, did not stand a chance among those types. However, times have changed. Today, co-location notwithstanding, retail traders are on a more equal footing and constitute a considerable amount of trading volume, making them a significant factor in the market (see “Commodity boom” below). 

Despite initially being met with protest, electronic trading now accounts for the majority of trading in the futures industry. While futures markets were undergoing technological changes, many participants were unaware of the benefits it would create for the industry as a whole. Due to the ease and accessibly of electronic trading platforms, traders can efficiently execute orders from anywhere. This gave rise to new demand for futures from traditional equity traders. In response, retail brokers had to provide access. Now, there is more liquidity than ever in the futures marketplace. Liquidity is one of the most important components traders should focus on when looking for a market to trade. Without liquidity, a winning trade can quickly turn into a disaster. If a trader is unable to close a position, or has to pay a high toll getting in and out of a trade, risk becomes a major factor. Ideally, traders want to be able to place a market order at any time and not lose their shirt due to slippage. The increased liquidity provided by electronic futures trading also leads to the stabilization of the markets because pricing is more efficient.

As markets become more stable, it is easier to transfer risk. Bona fide hedgers are still active participants in the futures markets. In order for them to protect themselves from price uncertainty, it is a necessity that they hedge their exposure to physical markets. Hedgers by definition are not looking for gains on that position. Their orders seek to lock in a price to transfer risk and remain open positions for a duration of time. And high frequency traders—while often derided as pariahs—mostly ensure very liquid markets. Simultaneously, retail traders looking to speculate provide the other side to hedgers. Often times both hedgers and speculators benefit in the same market conditions holding opposing positions. 

Retail trading has been one of the few growing segments in the futures space since 2008.  There is double digit growth in the amount of retail traders participating in the marketplace while industry growth remains flat from the institutional and hedging sides. Due to this growth, futures in general have gotten more attention and have moved into the mainstream of investing. It is not uncommon to see futures ads, commercials and websites all dedicated to educating people on understanding the futures markets. Five years ago, CNBC did not report on crude oil prices or have programs solely dedicated to futures markets. Education is a very important part of becoming a successful futures trader.  Not only will it help you to enter the market, but it will help you stay in the market. The amount of information to help traders navigate the added opportunity and risk that levered futures markets provide is much greater now than 20 years ago when studies showed upwards of 90% of futures accounts blew out. Futures, once thought of as the most confusing and intimating product to trade, are quickly becoming a preferred market to get involved in and actively trade.

About the Author