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Wednesday, June 19, 2024

Smaller Contracts for Individual Traders

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Eurex launched DAX® futures (FDAX) — based on the DAX® Stock Index of the 40 largest German stocks — in the 1990s. It quickly grew to one of the world’s most liquid stock index futures contracts. However, as the index grew along with volatility, FDAX was largely inaccessible to retail traders because of its size and margin requirements.

As a result, in October 2015 Eurex introduced the Mini-DAX® futures (FDXM), which is one-fifth the size of the big contract. This greatly expanded the reach of DAX® trading to a much broader audience, yet as the market grew throughout the last decade, even the Mini-DAX® presented more volatility than many retail traders could handle.

The cash DAX® chart below shows the growth of the index. The value of the DAX® has grown by more than 400% since its 2009 low. That means the size of the contract has grown by a factor of 4X since that time.

Source: Eurex

The Impact of Index Expansion

The success of the E-mini S&P 500 stock index and the family of E-mini stock indexes —  along with the electrification of markets and increased competition in the brokerage space that led to commission compression — resulted in short-term day-trading and swing-trading strategies becoming more viable for retail traders. In the not-too-distant past, only professional market makers and institutional traders with the benefits of scale had access to extremely low brokerage rates and margin offsets.

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This all changed as markets moved completely to on-screen price discovery and retail traders had access to various independent software vendor match engines and complex technical tools. As the many efficiencies of electronic trading grew, the cost of trading dropped significantly.

As the ranks of day traders and swing traders grew, much like the E-mini S&P 500, the Mini-DAX® became a large market that was too volatile for many retail traders. So Eurex followed up with a Micro-DAX ® futures (FDXS), one-fifth the size of the Mini, which, in turn, is one-fifth the size of the FDAX (see table below).

Here are the specs for FDAX, FDXM, and FDXS:

FDAX FDXM FDXS
Quotation Euros per index point Euros per index point Euros per index point
Trading Hours Sunday to Friday, 7:00 pm to 4:00 pm ET Sunday to Friday, 7:00 pm to 4:00 pm ET Sunday to Friday, 7:00 pm to 4:00 pm ET
Tick Value €25 €5 €1
Duration Quarterly: March, June, Sept. Dec. Quarterly: March, June, Sept. Dec. Quarterly: March, June, Sept. Dec.
Settlement Cash Cash Cash
Close The third Friday of the relevant month provided that such day is a trading day at Eurex; otherwise, it shall be the trading day immediately preceding. The third Friday of the relevant month provided that such day is a trading day at Eurex; otherwise, it shall be the trading day immediately preceding. The third Friday of the relevant month provided that such day is a trading day at Eurex; otherwise, it shall be the trading day immediately preceding.
Last Trading Day/ Settlement The last trading day of the Index Futures Contracts is the third Friday of the contract month provided that it is a trading day at Eurex; otherwise, it is the trading day immediately preceding. The final settlement day is the last trading day. The last trading day of the Index Futures Contracts is the third Friday of the contract month provided that it is a trading day at Eurex; otherwise, it is the trading day immediately preceding. The final settlement day is the last trading day. The last trading day of the Index Futures Contracts is the third Friday of the contract month provided that it is a trading day at Eurex; otherwise, it is the trading day immediately preceding. The final settlement day is the last trading day.

Why Trade the Micro-DAX®?

As noted above, there has been a trend towards more retail traders employing short-term day- and swing-trading strategies. Although low commissions make these strategies viable, they can result in larger volumes, which makes the added flexibility of a smaller-sized contract extremely beneficial.

The average true range of DAX® futures (FDAX) currently has been above 200 points for more than a month, reaching a high of 288 on March 24 — a range in price of more than €6,500. This is too volatile for the average retail trader, even if a trader does not hold positions overnight. Even when you divide that gearing by a factor of five with the Mini-DAX® (FDXM), you get a daily range of €1,300, a great deal of volatility for many traders to manage.

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A basic retail trading account can handle trading one or two Mini-DAX® contracts, but that doesn’t allow for scaling, and stops would need to be tight. The Micro-DAX® (FDXS) moves €1 per index point, 1/5 of the Mini. This means that if — based on your account size and risk tolerance — you can only trade one or two of the Minis, you can trade five to 10 Micros. This provides you the flexibility to manage your trades without getting stopped out on short-term volatility. You can scale into positions one or two Micros at a time, allowing for wider stops once the market moves in your favor. It also enables you to take partial profits and move your stop up as the market moves in your favor and maintain the opportunity for profit.

Dan Grazma, President of Gramza Capital Management, calls the Micro-DAX® a game changer. “It reduces the capital requirements to hold a position and the price exposure per tick,” says Gramza, an international trading consultant. “This reduced cost allows the trader to follow their trading strategy and increases their comfort and confidence in their trading technique.”

Many trade and risk management procedures require the trader to be able to split positions into manageable chunks to fully exploit their benefits. It usually comes down to capital requirements.

“The trade management and risk management strategies are much easier for the trader to follow [trading the Micro-DAX®] because of the reduced capital requirements and exposure per tick,” Gramza says. “This can have a powerful impact on the trader’s performance. It allows the trader to be more consistent and it increases their confidence in their trading strategy.”

The current geopolitical environment increases the value of trading and hedging with DAX® futures, and it also ramps up the potential volatility, so the flexibility provided by the Micro-DAX® can make the difference between success and failure.

To learn more about the Micro-DAX® and other DAX® futures, download StoneX’s Trading Eurex’s DAX® Family of Index Futures e-book today.





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