When 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 two measurements of market quality of the original equity index futures (bid-ask spreads and trading volume) have not been negatively impacted, but one other measurement (price volatility) has increased, following the introduction of the E-mini equity index futures. Our empirical results also suggest that the E-mini index futures contracts have successfully attracted smaller investors to the equity index futures markets. In particular, 70 percent of all E-mini contracts traded are in single-contract units, and 95 percent 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.