E-mini is a small futures contract on the S&P 500 stock index traded electronically on the CME’s Globex platform. It offers low margin requirements and greater market liquidity, but has drawbacks such as limited trading orders and active management. E-mini trading caused the 2010 flash crash, leading to new government regulations.
An E-mini is a small futures contract on the Standard & Poor’s 500 (S&P 500) stock index that investors trade electronically on the Globex platform of the Chicago Mercantile Exchange (CME). The CME first introduced E-mini trading in 1997 in response to investor complaints that the standard S&P futures contract was too expensive for the average investor. E-mini trading has grown in popularity since its inception, with an average amount of dollars traded daily around $140 billion United States Dollars (USD). An E-mini contract is worth approximately $50 US dollars (USD) times the value of the S&P 500 Index. E-mini contracts can also be obtained for other indices, such as the Russell 2000 and Nasdaq 100.
E-mini trading also offers the distinctive advantage to the average investor of low margin requirements. While the standard futures contract often calls for a performance bonus of several thousand dollars, E-mini trading requires margins as low as $100 USD. In highly volatile and inflationary markets, spreads for full-size contracts can rise sharply, making it difficult, if not impossible, for the average trader to enter the market. The E-mini offers a low-cost way for a small investor to get involved in the market without making an exorbitant capital investment.
In addition to its greater affordability relative to conventional futures contracts, E-mini trading offers other advantages to investors. Both the lower prices for E-mini contracts and the global electronic marketplace produce greater market liquidity by opening up E-mini trading to investors around the world. The electronic trading platform trades more than 23 hours a day, five days a week. Unlike traditional trading of S&P 500 futures contracts, which is still conducted in the open sky, electronically managed E-mini trading prevents slippage, improving bid and ask price reliability.
Although E-mini trading does extend an investor a profitable entry into the stock index market, he must also consider the drawbacks. Mini markets allow a limited number of trading orders. For example, many investors want to place a good-canceled (GTC) order to limit losses. GTC orders are not available in mini options markets, so traders have to place stop limit or stop orders daily before trading begins. For this reason, E-mini trading requires active management or closing all positions overnight.
On May 6, 2010, a flash crash in the markets occurred. After an intensive investigation into the reasons for the accident, the United States Securities and Exchange Commission (SEC) concluded that E-mini trading caused the accident. Apparently a large mutual fund sold 75,000 E-mini contracts in one day, causing high-frequency traders to sell their contracts. The combined sales from the high-frequency traders and the mutual fund resulted in a three percent drop in the price of the E-mini in just four minutes. In response to the sudden crash, new government regulations have imposed new trading restrictions that halt trading for five minutes when any stock in the S&P 500 falls or rises more than 10 percent in a five-minute period.
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