CBOT Launches New $25 "BIG" Dow Product

CBOT Launches New $25 "BIG" Dow Product



CHICAGO, February 13, 2006 – The Chicago Board of Trade (CBOT®) announced today it will list a new Dow(SM) $25 futures product to be known as the "BIG" Dow contract. The contract is expected to launch on March 20, 2006 and will expand the CBOT's Dow Jones Industrial Average (DJIA (SM)) futures complex to meet the demand for a larger sized, electronically traded product.

CBOT Senior Vice President of Business Development Robert D. Ray said, "Our new BIG Dow product will facilitate additional trading opportunities as the result of the fungibility within the CBOT's DJIA futures complex, as well as with other broad-based equity index futures contracts that have a significantly high correlation to the DJIA. In addition, offering a BIG Dow contract with a $25 multiplier is very attractive to a broad spectrum of market participants. The CBOT BIG Dow contract will represent, in terms of notional value, the single largest equity index futures contract traded exclusively on an electronic platform."

Dow Jones Indexes/Ventures President Michael A. Petronella said, "We are convinced that the new $25 Dow product developed by the CBOT will further strengthen the usefulness to investors of the Dow Jones Industrial Average futures complex. The extension of the Dow products at the CBOT demonstrates continued strong interest in this premier index and the CBOT's leadership in serving that interest."

The CBOT will determine the daily settlement prices of the CBOT Dow futures contract based upon a settlement calculated for the electronically-traded, mini-sized Dow futures contract. The new BIG Dow futures contract will be cash settled on the final settlement day, which will be the third Friday of each contract month.

The CBOT is also creating a market maker program for the BIG Dow futures contract to ensure a tight two-sided market to take place during core U.S. equity market trading hours (6:15 p.m. – 4:00 p.m. CST, Sunday – Friday). The CBOT is currently in negotiations with several liquidity providers.

The CBOT DJIA futures complex, which includes the CBOT mini-sized Dow ($5), the CBOT Dow ($10) and CBOT BIG Dow ($25) futures contracts are based on the Dow Jones Industrial Average (SM) – one of the world's most readily recognized and followed stock indexes. These products provide large and small investors a way to take a position based on the performance of the DJIA (SM), to diversify and protect their portfolios against potential adverse price changes in the stock market, and to preserve investment value.
Personally I don't think that this contract will do well. Why spread the liquidity across several different contracts and decrease the liquidity in each of 3 contracts? Rather axe the $10 and this one and put all of the liquidity into the $5 contract. Is it really that difficult for someone to trade 5 contracts in the $5 contract compared to 1 contract in the $25 contract? Will the $25 contract attract an investor that wouldn't trade the $5?

"...very attractive to a broad spectrum of market participants..." who are these people?

Are there fee and commission advantages to trading this large contract? Fee and commission rebates for traders who only trade in 5 x $5 lots could solve this problem...

I am confused...
Perhaps this is an attempt to take liquidity away from the big SP contract ?
Originally posted by pt_emini

Perhaps this is an attempt to take liquidity away from the big SP contract ?
I have no doubt that you're right - they even use the same nomenclature: "big"

I think that the ES is doing a good job of taking liquidity away from the SP. Now we have to analyze the reason why the ES is taking liquidity away from the SP: Is it because the ES trades electronically or because the ES trades in smaller size? If the former then perhaps I am wrong and the big dow (will they call it the BIG DOG?) will take some away from the SP - another nail in the SP coffin?
Some highlights from the CBOT Big Dog Dow Benefit Sheet:

...combined average daily volume in CBOT Dow futures and
mini-sized Dow futures exceeds 100,000 contracts, or $6.4 billion in terms of notional value...

...high correlation of the DJIA to broader U.S. indexes, such as the S&P500® (an approximate 95% 50-day rolling correlation)...

...In terms of notional value, the BIG Dow futures contract represents the single largest equity index futures contract traded exclusively on an electronic platform...
[Comment: The S&P500 future is traded both pit and electronically so it is not "exclusively" traded on an electronic platform. Appears to support pt_emini's theory that The Big Dog is trying to display the Big S&P500 future.
Two weeks have elapsed since the Big Dow Contract was launched. Here are the volume figures for this contract. Remember that it trades at 5 times the size of the mini dow and 2.5 times the size of the regular dow so take this into account when comparing the three.

I'm not sure what CBOT's initial goals for this contract were in the first 2 weeks so I don't know if this is under or over their expectations for this contract.

Date ---- Vol Count
3/21/2006 401 355
3/22/2006 307 263
3/23/2006 162 120
3/24/2006 242 190
3/27/2006 193 127
3/28/2006 519 371
3/29/2006 529 370
3/30/2006 501 334
3/31/2006 263 157
Grand Total 3117 2287

I've also just noticed that the volume almost doubled in the second week of trading. 1,112 contracts in the first week and 2,005 contracts in the second week with Tuesday, Wednesday and Thursday each recording more than 500 contracts.

Anybody trade this contract? If so, why? Were you arbitraging it with the smaller contract?
Have you ever noticed when "they" introduce a new product to the market place the first guys and gals in usually arb the hell out of the inefficiecies till everyone knows the rules...
Well it's pretty tough to arb an illiquid market against any other market because the spread is usually too wide and keeps track with the more liquid market that you are arbitrating against.

So if the DD (Big Dow) were quoting 11125 - 28, then the YM was probably quoting 1126-27 making it impossible to arb the two. Remember that the bid of one has to be higher than the ask of the other (and vice versa) in order to allow someone to arb the product.

I admit that I have not been watching the spread on the DD so can't say what it's been like but I would be amazed if it was possible to arb it.