Volume 14 | Issue 2 | Article 3
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When Contract Size Matters: The Case of Equity Index Futures
The Chicago Mercantile Exchange introduced E-mini S&P 500 index futures in September 1997, and E-mini Nasdaq 100 index futures in June 1999. This paper empirically examines the effects from the introduction of the E-mini futures contracts on the market quality of the original S&P 500 and Nasdaq 100 index futures markets. The analysis is performed in a structural model framework, using bid-ask spreads, trading volume, and price volatility as measurements of market quality. We also evaluate, by using trader-size distribution data and the Commodity Futures Trading Commission's "Commitments of Traders" reports, whether the introduction of E-mini contracts has achieved their intended goal of attracting smaller investors. Finally, we evaluate any differences in the types of traders who use the E-mini futures contracts versus the original equity index futures contracts. Our empirical results suggest that bid-ask spreads of the original equity index futures have been negatively affected, the trading volume has not been adversely affected and the impact on price volatility are mixed. Our empirical results also suggest that the E-mini index futures contracts have successfully attracted smaller investors. In particular, 70% of all E-mini contracts traded are in single-contract units, and 95% are in units of less than five contracts (that is, less than the dollar value of a single original equity index futures contract). Furthermore, we found that a portion of the new, smaller traders in the E-mini equity index futures markets consists of day traders.
