CME Futures Contract Changes

Don Dawson

One of the things I enjoy most about trading Futures is there is always something new to learn about it; whether it is trading technology, globalization of the markets, geo-political events, the constant changing of market correlations and/or events that directly impact a Futures contract.  Trading is not for people who think there is some holy-grail trading system out there and once they find it they never have to study the markets again. Trading as a professional is a life long journey of learning and having a passion for trading.

Free WorkshopIn this article I would like to bring you up to date about a couple of things happening at the CME Futures Exchange affecting some of the markets we trade.  The first one will be about the Japanese Yen Futures (6J- electronic symbol and JY- open outcry symbol).  And the other about a change in Temporary Trading Halts when prices trade out to prices that would trigger circuit breakers for the Interest Rate, Forex and Metals markets Futures contracts. These changes both relate to a Futures contract specification change.

In the Futures Markets there are two types of participants, a Commercial trader or a Speculator.  Both use the markets to reach different goals.  The Commercial uses the Futures markets to offset price risk (Hedging) and the Speculator uses the market to capitalize on being right about market directions (Speculates).

Even though they have different agendas in the Futures markets, they both trade the same standardized Futures contract listed on any Futures Exchange.  A standardized Futures contract allows traders to know what they are getting into before they place the trade, no guessing.

The first change is to the Japanese Yen Futures contract.  When trading this contract a trader is controlling 12,500,000 Yen.  This contract is also physically deliverable as well.  The minimum price increment is .000001.  To find the minimum price increment dollar value you would multiply the contract size by the minimum price increment.

12,500,000 X .000001 = $12.50 per tick

On Sunday June 21, 2015 the CME Group Exchange will be changing the minimum price increment to .0000005.  This will impact your potential profit/loss statements. Basically the Exchange is cutting the minimum price increment in half.  Now it will look like this.

12,500,000 X .0000005 = $6.25 per tick

There have been no reasons given for this change.  We can have our opinions why but they don’t matter.  The rule has been invoked and we, as traders, must deal with it.

The next rule change relates to the circuit breakers for the Interest Rate, Foreign Exchange and the Metals markets Futures contracts on the CME Exchange.

Circuit Breakers are prices the Exchange has in place each trading day to temporarily halt trading if price trades to these extremes.  It is very rare these markets will trade to their respective circuit breakers, but the CME Group has these in place in case an illiquid condition exists in the market and it moves too fast either up or down.

Once price hits these circuit breakers the Exchange would halt trading for 5 minutes and then resume trading when the bid and ask prices came back to a more liquid condition.  Once the 5 minutes are up the market is free to move up more or to fall from that price.  This is unlike a Limit Move in the Grain and Livestock markets where the Exchange sets a limit on how high or low each day’s price is allowed to move beyond the prior day’s close.

The change to the contract states that in the Interest Rate, Foreign Exchange and Metals Futures markets that the temporary trading halt is going to be for 2 minutes effective May 10, 2015 instead of the current 5 minutes.

Circuit breakers are different for each asset class.  And their occurrences have been very rare to date.  A trader can look at the contract specifications page and find out if their market has a daily circuit breaker price.

For the last 4-5 years the Federal Reserve has been keeping interest rates near zero percent and some of these markets volatility have been reduced dramatically.  Now that there is speculation that the Federal Reserve will be raising rates soon the markets are already showing signs of increased volatility.

For the most part you will probably find these circuit breakers being approached during the Extended Trading Hours (ETH) due to the illiquid nature of the markets at that time of the day.  This will probably be because of some news event of one country or the other doing an aggressive or surprise interest rate change.

These circuit breakers are for everybody’s protection in the markets.  With any luck we will never have to experience one, but a trader should be aware of them.  Keep in mind they are not as dangerous as Limit Moves because once the trading resumes at least the market is free to move either way.

“Life is simple, you make choices and you don’t look back”

Don Dawson

This newsletter is written for educational purposes only. By no means do any of its contents recommend, advocate or urge the buying, selling or holding of any financial instrument whatsoever. Trading and Investing involves high levels of risk. The author expresses personal opinions and will not assume any responsibility whatsoever for the actions of the reader. The author may or may not have positions in Financial Instruments discussed in this newsletter. Future results can be dramatically different from the opinions expressed herein. Past performance does not guarantee future results. Reprints allowed for private reading only, for all else, please obtain permission.