The New Mini DAX Futures

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Illuminated Stock Exchange By Night In FrankfurtYep, that’s right. Eurex have just announced the introduction of a new product to their already successful futures lineup – the new Mini DAX Futures.

On the rare occasions when an exchange releases a new contract of genuine importance, there is always likely to be a degree of anticipation and perhaps even some excitement. However, when a great product like the DAX gets a new set of specs, things get really interesting.

Contract Specifications

So let’s not dally about. Let’s get straight to what the new contract specs are.

The new Mini DAX Futures (FDXM) will be traded in 1 point tick increments and be €5/point versus the full DAX Futures (FDAX) which is traded in 1/2 point tick increments and is €25/point or €12.50/tick. They will be listed in the same quarterly cycle, roll at the same time and also be cash settled.

At this point, I do not know what the round trip cost of the new contract will be, but given the way the DAX moves, it’s unlikely to be too much of a sticking point even if it’s the same as the big DAX contract. I’d love it if the cost of an RT was 50% or lower, but realistically I’m not sure that this is likely to be the case. We shall see. I will update this post when I know more.

Who Cares?

Well you might think that taking a big contract and making it much smaller is a bit of a waste of time. But the truth of it is just the opposite.

A single full DAX Futures contract has a notional value of €25 x 10,000 (point value times by the current price, give or take) = €250,000 and as recently as April this year, it was getting towards €312,500!! So if you need to hedge a long-term cash market position for example, it’s tough to do so on such a large product. So ETF’s might be the way you’d go instead.

Then of course there are the smaller guys like day traders. The DAX is a great market but just moves so much and is already expensive per tick. It’s not rare for it to move 300 points in a day – that’s €7,500 per contract in range!! Some days it will move 500 points.

For a day trader with a smaller account who wanted to trade the DAX, one of the few options available was to trade a DAX future CFD (note: DAX index CFD which many brokers offer, is not the same thing). But this hasn’t been available to traders in all countries and has inherent risks such as it not being a centralized exchange regulated market.

Hedgers or day traders are just a couple of examples of participants who are likely to be interested in the new Mini DAX Futures. If it works, it is going to be more liquid, slightly slower and it will be easier to accurately manage risk on positions.

Will it Even Work?

But will it even work? There are plenty of products that are launched and fail. Indeed there was a mini-sized US dollar-denominated DAX introduced by the now defunct USFE exchange back in ’08. This product unfortunately went the way of the dodo for various reasons which I won’t get into right now.

Laughing businesswoman covering her mouth.Then of course there was the E-mini S&P 500 Futures. It was introduced by the CME in the late 90’s and was initially 1/10th the value of the big S&P contract (which itself was later halved).

It was also listed with a quarter point tick increment instead of the one tenth of a point tick increment which the full contract had.

People laughed at it.

I really don’t believe there’s any more I need to say about the E-mini S&P 500 Futures!

Eurex is a solid exchange and has been about since the beginning of screen-based futures trading. They have done their homework on the Mini DAX Futures. In fact, there’s been talk of a mini DAX for a good few years now. And there’s a genuine need for it too, as we see higher prices and greater market volatility.

The Mini DAX Futures are very likely to succeed and be a big hit.

What to Expect

Eurex have announced that the Mini DAX Futures will be available from 28 October 2015 in addition to the existing FDAX.

The trouble is whether or not people will initially trade them. Whilst it remains to be seen just how liquid they will initially be, even if the daily volume levels are relatively low there should be reasonable liquidity due to the designated market maker schemes they will be running until at least the end of March 2016. Market makers will have the obligation to quote.

If you’re going to trade it, I would strongly suggest just watching it and not trading it for at least a couple of weeks to begin with.

The fact is that it’s a new contract and although the liquidity might look to be reasonable, it might not always behave as you expect. Plus you can’t be certain that there won’t be any teething problems given the fact that it’s a brand new product.

I’d also suggest you chart the full product too. If you’re a Netpicks owner (such as Trend Jumper or Counter Punch), your trade plan will be tested on the full product and more than likely be using tick or volume (share) bars. Given the vast difference in contract specs, setups won’t be what they should. So chart the FDAX and (if you choose to) trade the FDXM.

Let’s see where the new Mini DAX Futures take us and just maybe they’ll bring some great opportunities to those who trade them!

Trade well.

More posts by Coach James can be found here

 

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Coach James

James began his trading career nearly a decade ago, learning his craft in fixed income derivatives. These days, he predominantly day trades index futures using auction context as the vital ingredient to his approach. James is a firm believer in the importance of trader psychology and how it can make such a monumental difference to how well a trader performs.

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