In an extremely volatile market environment, hedges against geopolitical risk and inflationary pressures are in demand. “The geopolitical landscape is not adhering to a nine-to-five cycle, so being able to trade and react to events around the clock is an immeasurable advantage for investors,” says Tim McCourt, Global Head of Equity and FX Products at CME Group, the world‘s largest financial derivatives exchange. ”Our US benchmark index futures are the liquidity pool market participants turn to regardless of the time of day. That’s why our products are often trading at multiples of the corresponding ETFs.”

Rising interest rates are another factor that could contribute to higher participation in the futures market, according to McCourt. “The costs of capital are increasing and trading futures is much more capital efficient then fully funding activities in the cash market or using higher-marginal rates in Over-the-Counter derivatives,” the equity expert states.

Meanwhile, investors are using options on individual futures in order to manage the elevated volatility, leading to a spike in trading volumes at the start of the year. Derek Sammann, CME Group’s Global Head of Commodities, Options and International Markets believes that options trading growth will continue over the next few months. “Options have been the fastest-growing portion of our business over the course of the past five years, having reached about 21 percent of overall volumes,” Sammann emphasizes. “The demand is especially strong outside the US, and we are building into that by expanding our commercial services for clients in Asia.”

Volatility index futures have also become an increasingly popular avenue of participation. In October 2020, CME launched a new contract on the Nasdaq 100 Volatility Index (VolQ), which is supposed to offer investors a narrow focus on market moves without the need to manage strike prices, time decay, or the delta hedging of options. “We originally launched the VolQ future with a multiplier of 1000 index points, but customer feedback revealed that it was too large,” McCourt says. “Hence, we lowered the contract multiplier to 100 index points to make it more accessible.” In contrast to the CBOE Volatility Index (VIX), which includes out-of-the money, deep-out-of-the-money and at-the-money S&P 500 Index options, the VolQ only focuses on the latter volatility component. “Many investors traditionally limited their volatility strategies to the S&P 500, but we expect growth in Nasdaq-specific strategies. The mega caps at the top of the index are only becoming more important in global portfolios,” McCourt stresses.

Despite the sharp pullback in equities markets overall, CME Group believes that index choice could play an increasingly important role in futures trading this year. “Multinational and US-centric indices will react very differently to further challenges like interest rate hikes based on their sensitivity to the Dollar,” McCourt says. “Having many different products in one place allows investors to enjoy margin offsets and capital efficiency benefits.” Nevertheless, CME expects the focus on major US benchmarks like the Nasdaq 100 and Dow Jones to continue in the current environment, as equity investors are likely going to use the most liquid futures contracts to manage risk.

With stocks experiencing a rapid downturn and inflation accelerating, commodities have become the center of attention in financial markets. In the course of the war in Ukraine, European natural gas prices have reached records while crude oil has been trading at the highest levels since 2008. “Given the increased volatility in oil and gas markets globally, the need to manage risk is more important than ever. We are experiencing an enormous amount of global participation in our West Texas Intermediate (WTI) contracts as fears of losing the Russian oil supply mount,” Sammann says. As Brent still trades at a premium to WTI, Sammann expects investors could find opportunities in trading that differential, in turn moving US crude oil’s share in open interest and market volume closer to that of its North Sea counterpart.

“On the natural gas side, the development has the potential to be even more significant,” the commodities expert emphasizes. “The demand for Henry Hub could increase even further as it’s still the lowest marginal cost gas on the global market.” The decisive factor limiting the ability of American producers to fill the global supply gap, according to CME, is the number of liquefaction facilities in the US. But with more terminals to come online within the next few months, the growth of LNG exports to Europe and Asia is expected to increase further. “This will reinforce the global benchmark status of Henry Hub and drive futures trading volumes,” Sammann predicts. CME has a share of over 80% in the Henry Hub futures market, also running benchmark liquidity pools in other commodity classes like industrial metals and grains – all of which have seen prices spiking in the wake of Russia’s invasion in the Ukraine.

But even before the war broke out, structurally scarce supplies and an explosive demand increase due to the economic recovery from the pandemic lead to rising prices for raw materials. Retail investors have increasingly been trying to participate in the rally – however, benchmark futures contracts are often too large to be a viable option for these traders. Standard WTI contracts have a notional value of 1000 barrels of oil times the agreed upon futures price. To attract active private investors, CME expanded the micro contract suite it has been building since 2018 and rolled out micro WTI futures representing one-tenth the size of the benchmark contract in July 2021. In November, the new products set an all-time volume record for a micro contract. Since launch, trading volumes have averaged at over 70000 contracts a day. “Retail clients are responsible for a significant portion of that, but micro futures are also popular with institutional investors who want to deploy nimble and tactile trading and risk management strategies,” Sammann says.

“We have also seen positive adoption trends across other micro contracts, whether for gold, FX, Treasury yields or crypto,” McCourt states. “The smaller-sized futures are complementary tools to their older, larger siblings while also opening up the market to new participants.”

In the crypto space, CME has been offering regular futures contracts since 2017 and launched micro Bitcoin futures in May 2021; followed by the introduction of micro Ether in December. The exchange also recently announced plans to launch options contracts on its two micro crypto contracts on March 28. “This will allow all traders to efficiently hedge market-moving events with higher precision and flexibility,” McCourt says. Digital assets have continuously been characterized by high volatility over the last few years. “It’s still a little too early to tell whether investors are content with employing option-specific strategies or whether the market needs standalone implied volatility futures for crypto,” McCourt adds.

CME already tracks volatility across its benchmark products in the Treasury, short-term interest rates, FX and commodities segments through its CVOL index. “We are now doing end-of-day calculations,” Sammann says. “Once we have converted to real-time intraday calculations by the end of the second quarter, we will gather customer feedback on whether there is enough interest in futures on our volatility indices. As geopolitical risk persists and rates are normalizing, I believe we are going to see a lot of demand for additional volatility products.”