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E*Trade to launch futures trading platform

/ Source: Financial Times

E*Trade, one of the largest online brokers, will next year launch a trading platform for futures contracts to capitalize on the growing popularity for such instruments outside their traditional users — hedge funds, bank brokerages and highly specialized traders.

As part of its plans, E*Trade has become the first online broker to buy Chicago Mercantile Exchange memberships, a move that will lower trading costs and let it tap into the exchange's growing range of futures aimed at smaller investors.

The moves are a sign that the recent explosive growth in futures trading is convincing some in the industry that futures, like options more than a decade ago, are starting to appeal beyond a relatively small group of specialist "day-traders".

They are also a sign that brokers want to profit from derivatives markets, which are attracting more activity amid volatility in interest rates and energy and commodity prices.

John Barun, chief executive of Capital Markets Consulting, a trading software consultancy, said: "We are seeing more and more firms that have been focused on equities wanting to migrate to futures. They see the volume growth in futures and where there's activity there's profit potential."

Joe Sellitto, director of derivatives products at E*Trade Securities, said that while it already offered futures to traders who inquired about them, E*Trade wanted to reach "a much broader group than trades them now".

That did not extend to all of E*Trade's 3 million registered customers because futures are still seen as too risky for ordinary investors. But Mr. Sellitto said: "Currently the user base is active, knowledgeable traders, but I believe there is a retail customer that has yet to realize the potential of futures as a risk management, hedging and asset allocation tool."

He defined such potential customers as "retail active traders" who trade more than 27 times a quarter and do not derive their main source of income from trading. That compared with "hyper- active traders" who trade up to 1,000 times a quarter.

Futures are contractual agreements to take delivery of a commodity or index - such as government bonds, wheat or the Standard & Poor's stock index - at a specified future date. Retail interest in them began at the CME in the late 1990s in the form of small-sized futures contracts, known as e-minis.

Access to futures for individuals was until recently only possible by telephoning brokers specializing in them, or by assigning funds to be managed by commodity trading advisers. But companies have emerged offering access for specialist investors online, including Interactive Brokers, TD Waterhouse and Charles Schwab, via its CyberTrader online derivatives arm.

Lind-Waldock, a broker specializing in futures, said there were 400,000 futures trading accounts in the US, against about 6m for equities trading. CyberTrader said it had no plans to broaden its customer base beyond traders "who frequently engage the market and usually execute several times a day".