Much to gain from new mini SET50 Index futures

Economy April 29, 2014 00:00

By Kesara Manchsree

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Whether you're an individual investor or an institution, when it comes to futures contracts, size does matter.

And under volatile market conditions, bigger is not necessarily better. Small contracts can mean more flexibility and risk control, which are major benefits when the market is erratic. Thailand Futures Exchanges offers a new mini SET50 Index futures contract starting from May 6, 2014 onwards.
The SET50 Index is comprised of the largest 50 listed stocks, therefore allowing you to easily and effectively buy or sell an extremely well diversified portfolio of stocks in one stock index futures contract. This allows you to make trading/investing decisions based on your overall outlook of the stock market.
The Thailand Futures Exchange (TFEX) introduced the SET50 Index futures contract back in summer of 2006. The contract multiplier was Bt 1,000 per index point. 
The SET50 Index futures was the most actively traded equity futures contract, before the introduction of single stock futures in late 2008. The single stock futures slowly gain popularity and finally the trading volume surpasses that of SET50 Index futures last year. 
One of the many reasons for this is because at the time SET50 Index futures was launched, the SET50 Index was only at 533.86 points compared to the high in 2013 when the index doubled to 1,092.27 points. What this means for investors is that the capital commitment (initial margin) to enter a trade of SET50 Index futures not only doubles but triples to Bt 98,800, quite an expensive trade when compared to single stock futures where their initial margins ranges only from Bt200 to Bt35,000.
However, things are about to change. We will reduce the contract size of the SET50 Index futures down to one-fifth, from Bt1,000 to Bt 200 per index points. Everything will be reduced proportionally including the initial margin and the exchange fees. 
The initial margin will be reduced to one-fifth (Bt13,300 at current rate), meaning less money locked down into one particular contract, allowing for more portfolio diversification. With smaller contracts, you can spread your ideas among multiple markets and multiple contracts, and put less money at risk in each one. 
The exchange fees will also be reduced from Bt35 to Bt7.
As the date approaches, we have done extensive tests to make sure that the transition goes smoothly. Any open positions prior to the launch date will be automatically increased by five times (5 mini SET50 Index futures will be automatically converted from 1 SET50 Index futures). This is similar to 5-for-1 stock splits, where five shares will be issued from one share currently held. All this will be done automatically on the morning of May 6  and investor may trade the new mini SET50 Index futures right away.
The trading symbol will remain the same to avoid any confusion (S50myy). 
Another improvement we have made in parallel to the launch of the mini SET50 Index futures is the extension of the afternoon session. Originally, the afternoon session opens at 14:30 hrs, as of May 6 while  the afternoon session for all derivative contracts will open 15 minutes earlier; at 14:15 hrs. 
The closing time will remain unchanged.
A smaller contract can have many benefits; namely, risk control, flexibility and diversification opportunities. Smaller contracts allow you to get exposure to a certain market without committing too much capital. This will be very appealing to the individual retail and active trader. For new traders, smaller contracts allow for learning opportunities too.
The added flexibility is extremely important, especially for certain short-term trading strategies. If the size of your account allows you to safely trade only one or two SET50 Index futures at a time, this may put you at a disadvantage. 
Many short-term strategies call for you to take profits on a small move and then move your stop loss to a break even. If you are trading 5 mini SET50 Index futures instead of one SET50 Index futures, you could lock in small profits and hang on to a couple of contracts for a breakout move.
The author, Kesara Manchsree is Executive Vice President and Head of Markets Division, The Stock Exchange of Thailand and Managing Director of Thailand Futures Exchange (TFEX)