The Small Exchange is a newly formed marketplace aiming to make futures trading more accessible with capital-efficient products that are small, simple and standardized. In this comprehensive article, we’ll go over what the small exchange is, how to use it, and what products they offer. We’ll also examine the differences between the Small Exchange and other exchanges.
An exchange is simply a facilitator between buyers and sellers of traded securities. They provide the technology and oversight to smooth out meetings between customers and selling parties so they can interact and make trades. Basically, an exchange guarantees the trade. This way person A doesn’t really need to care who person B is before buying or selling from each other.
An exchange also creates the symbols for the securities being traded for easier standardization and identification. They also allow clearinghouses like the OCC or CME and other counterparty groups to fill the orders and clear the trades.
The Small Exchange is a recently launched futures trading market designed to cater to retail customers. It’s based in Chicago and is backed by award-winning industry innovators. The goal behind it is to make the futures market more accessible to retail and institutional investors.
Trading futures has typically been more capital-efficient than trading traditional stocks, especially since they allow for trading with leverage. However, they also have a rather complex design and generally large lot sizes. This makes it challenging for modern traders to adopt futures for speculative and risk management purposes.
The Small Exchange or “The Smalls” aims to solve this problem by offering futures that are simple, small, and standard. This means that all the futures offered share the same tick size and expiration date so that investors can do more trading without having to put lengthy research into each symbol.
The smaller sizes of the products also mean that traders can manage their investments better and enjoy greater capital efficiency. Additionally, all the products on the Small Exchange are holistic representations of their respective financial markets. It’s like making standard trades, except in smaller sizes.
The Small Exchange Background
The Small Exchange was created with the idea of becoming the largest customer-centric futures exchange in the world. It bridges the futures product gap for all kinds of investors by providing small-sized, capital efficient products that are simple to use and easy to understand.
It was founded in January 2019 and launched in June 2020. The exchange is powered by a proprietary matching engine and risk management system. The Small Exchange is a designated contract market (DCM) with the Commodity Futures Trading Commission (CFTC).
The Small Exchange is the brainchild of serial entrepreneurs, Tom Sosnoff and Scott Sheridan. Sosnoff conceived the idea for a new exchange partly due to his loathing for the giant exchanges, especially for their refusal to credit him for all the innovative ideas that he’s sent their way over the years. “I hate all the exchanges… Exchanges drive me crazy because they think they’re entitled, and they don’t know who their customers are.” he stated in a comment to Chicago Business. Sosnoff is the chairman of the board at The Small Exchange.
Leading Up To Its Launch
In May 2019, The Small Exchange announced a new capital injection of $10 million, $5 million each from its partners, Jump Capital and Citadel Securities.
It also announced in September 2019 that it had partnered with the Options Clearing Corporation (OCC) to serve as its clearinghouse. During their launch preparations, they also announced support from numerous other industry partners, including Interactive Brokers.
In March 2020, the CFTC designated the Small Exchange as a DCM.
Products and Services
According to the president and CEO of The Small Exchange, Donnie Roberts, the exchange will initially offer three products: an equity index, a metals index, and FX. It also plans to introduce additional products, including options trading in the coming months.
Their FX product is the Small U.S. Dollar. It’s directly priced to the U.S. dollar so there is no more need for foreign exchange conversions. The metal index product they offer is the Small Precious Metals. It features a mix of the most popular tradeable metals on the market today. Their equity index product is the Small Stocks 75, which tracks five major stock sectors.
Market participants include Futures Commission Merchants (FCMs), market makers, liquidity providers, proprietary trading firms, Introducing Brokers (IBs), and hedge funds. All traded products are focused on making it easy for the average retail customer to access them.
For a limited time the Small Exchange is offering a subscription to individuals which affords them reduced transaction and market data fees for their whole life as a trader.
What Is the Difference Between The Small Exchange and Other Exchanges?
By now you probably already know that exchanges have their unique features that distinguish them from one another and the Small Exchange is no different. At first glance, it has lower fees, smaller products, supports individual investor needs, and offers access at much lower prices. Let’s take a closer look:
Fees on The Small Exchange are approximately half of what you’d find on most other exchanges. This is part of the company’s move to provide the best benefits to market participants. Exchange fees are the primary way for exchanges to make money so this is quite a big deal.
Additionally, this exchange does not distinguish between professional and non-professional traders looking to receive its market data, so there is no additional charge based on your account type or profession! Furthermore market data is free for the first 2 years and with an initial lifetime subscription individuals can lock in reduced market data fees for life when and if they are charged.
What Are The Fees Of Trading At The Small Exchange?
The Small Exchange may waive some or all of these fees and costs in a bid to ensure that it maintains a competitive and efficient market for its products. That being said, here’s a comparison between the fees charged by The Small Exchange and the fees charged by other leading exchanges.
the Small Exchange
Introductory Subscription Price
One time $100 fee
$0.07 per contract for Subscribers $0.15 per contract for Non-Subscribers $0.05 per contract for Market Makers
Varies by product $0.70/contract for Members $1.50 for Non-Members (metals products)
Varies by product
Market Data Fee
FREE! (waived for 2 years)
$105 per month
$110 Per ID Per Month
Member Application Fee
$250 for both clearing and corporate members
$4,500 for both General and Trade Participants $800 for Individual Participants
$11,500 for General Participants $4,500 for Trade Participants $600 for Individual Participants
All prices quoted above are in US Dollars. There may be additional clearing fees as assessed by the OCC. Market data subscribers may also be subject to set-up costs or fees from their market data provider.
Smaller Standardized Original Products
The Small Exchange essentially provides products for individual self-directed investors. On average, futures products typically command as much as $100,000 in notional size per contract. This is way too large for the everyday retail investor whose account balance is much less than $100,000. Hence the need for products that are significantly smaller but with high enough liquidity to allow for more fluid movement.
Additionally, the products listed on The Small Exchange are standardized. Each has the same tick size and expiration, plus all contracts are settled on a cash basis, which makes it a lot easier to understand and more appealing to retail investors.
Which Products Can You Trade On The Small Exchange?
There are three main categories of products available at the moment: precious metals, Forex, and Equities. However, the exchange plans to increase its range of products to include energy products, commodities, bonds and treasury among other products. The Small Exchange also plans to introduce options, though the timing for this will initially depend on having the necessary liquidity to support it.
Here are the products you can trade on The Small Exchange and their contract specs:
SM75 \ Small Stocks 75 (Available)
Small Stocks 75 tracks data points across five major stock sectors.
100x relative index
Tick Size \ Dollar per Tick
$0.01 tick = $1.00 per tick
7:00 am – 4:00 pm Chicago Time
Current and following month
3rd Friday of the contract month.If the 3rd Friday falls on a holiday, the termination is moved to the previous Thursday.
S10Y \ Small 10YR US Treasury Yield (Not yet available)
This product is priced simply to let investors just trade rates and avoid the typical complex calculations associated with bond alternatives. It has the symbol S10Y and a contract size of $700.
SMGO \ Small Global Oil (Not yet available)
This product combines crude oil benchmarks into a single index, effectively minimizing risks from exposure to changes in technology and geopolitics. It has the product symbol SMGO and a contract size of $3,400.
You can already see that the products on the Small Exchange are quite different than the products listed on other exchanges. The contract sizes alone mean easier access to the futures market than anyone has had until now, save for institutional investors. These products are also built by the exchange and its proprietary matching engine allows for a smoother trading experience.
Index & Futures Symbols
Small Stocks 75 Index
Small Global Oil Index
Small Precious Metals Index
Small Dollar Index
Small 10-Yr US Treasury Yield Index
Depending on your appetite for risk, available capital, and understanding of the various markets, any of the three products available at launch would be a great place to start trading on The Small Exchange. For example, when there’s a slump in crude oil prices, Small Global Oil may be a good bet. Meanwhile if precious metals remain relatively stable, SPRE could also be an option to consider.
What Is the Liquidity of the Products?
It’s only natural to wonder where the initial liquidity to fund these products will come from, especially since it’s a new exchange.
This gives the Small Exchange a massive advantage over other new exchanges, since they have access to established liquidity providers that can make their markets.
Support For Individual Investor Needs
While other exchanges are more supportive of institutional investors and companies, the Small Exchange is more focused on individual investors. You can see the difference just by looking at the contract sizes of the products offered, the lower membership fees, subscription offer, slashed exchange fees etc. between them and other futures exchanges out there today.
Aside from leveling the playing field of the futures market and allowing retail investors to take part, the Small Exchange also features new technology. This is evident in its proprietary risk management system and original matching engine. The beauty of having new technology is that it allows the exchange to improve further and streamline its processes in novel ways. With the right blend of innovation and resources, the Small Exchange could introduce newer, more efficient ways of trading down the line.
Original Matching Engine
The Small Exchange is powered by its own anonymous First in, First Out (FIFO) execution algorithm to match orders using the price-time priority of each order. This matching engine prioritizes orders received based on their effective limit price — the first order the matching engine receives at the best price level of the contract will be the first to be matched with a counterparty side order.
Most exchanges license an existing matching engine, but The Small Exchange has built its own from scratch. The main issue with licensing a matching engine from an existing exchange is that it is limited to current technological capabilities. You can’t really do anything special with it beyond what it has already been programmed to do. With a proprietary matching engine, however, the Small Exchange opens up a new world of possibilities, such as allowing investors to trade futures the way they trade options and stocks.
Subscriptions With Lower Prices
The Small Exchange is currenty allowing customers to buy subscriptions at drastically low prices and even offering a lifetime of half-price exchange fees. This was extremely generous on their part since it meant giving away half of its future revenue, but it was all part of their strategy to get enough people on board for ensuring a successful launch.
How to Trade on The Small Exchange
Individual traders looking to trade on the Small Exchange must first have a relationship with a registered Clearing Member either directly or through an intermediary. Organizations and institutional traders can connect to the exchange through direct market access or via an independent software vendor. Direct access participants must also first certify with the exchange before they can begin trading.
Market, limit, stop, and stop-limit orders are all supported on The Small Exchange. There is no specified limit price for submitted market orders and they are instead executed at the best price available in the Central Limit Order Book (CLOB) when the exchange receives the order. To prevent market orders from being filled at extreme prices, they are given protection prices and are then filled within the predefined range. These protection levels vary by product and are defined by the exchange.
Determining the protection price on bid orders involves adding the protection points to the current best offer price. On the other hand, determining the protection price on offer orders involves subtracting protection points from the current best bid price. The order is rejected if there is no liquidity on the opposite side to calculate the protection price.
Market Regulation – The Most Important Rules to be Aware Of
Market participants are protected under the Exchange rules as set out by the Small Exchange Regulatory Department. From time to time, the Regulatory Department will conduct trade practice and market surveillance to ensure that there are no violations, both to the Exchange rules and the regulations set by the CFTC. This is part of the exchange’s responsibilities as a DCM.
Notifications And Rule Filing
Market participants looking to stay up to date on notifications and rule filings can sign up for emails from The Small Exchange.
Market Notices – This includes information on market events, holiday notices, trade errors, disciplinary actions, trade corrections, technology notices, amendments to the Rulebook, and other notices relating to regulatory items of the Small Exchange.
Exchange Updates – This includes the latest information on products traded on the Small Exchange, as well as press releases, market recaps, and other exciting updates.
All order routing and front-end audit trails for electronic orders are the responsibility of the Clearing Members. In line with Exchange Rule 524, all Electronic Order Audit Trails must include the order entry, order receipt, and any order modification messages.
Contacting The Regulatory Department
Should you have any need to get in touch with the Small Exchange’s Regulatory Department regarding rule violations, you can send an email to [email protected] Be sure to include the following details on your message:
The date and approximate time of the incident.
The product’s contract month and year.
All known facts and circumstances of the incident.
Outrights – All products traded on the Small Exchange have the current month and the following month available for trading. At the expiry of the current month’s contract, the new month begins trading on the next trading day.
Spreads – This refers to the practice of buying one futures contract and simultaneously selling another. The Small Exchange supports both calendar and cross-product spreads.
Calendar (intracommodity) spreads – Each product has two trading months listed, which comprise the months for a calendar spread. Calendar spreads are constructed by selling the shorter month and buying the longer month or vice versa.
Cross-product (intercommodity) spreads – These are recognized spreads between different products that have the same expiration month. Examples of accepted cross-product spreads on The Small Exchange include:
Small Stocks 75 vs. Small 10 Year US Treasury Yield
Small Precious Metals vs. Small Global Oil
Small Dollar vs. Small Global Oil
Small Precious Metals vs. Small Dollar
How Can The Small Exchange Help You Reduce Risk and Diversify Your Portfolio?
Diversification is a known strategy for minimizing the risks associated with volatile market swings by investing in different asset classes in a portfolio. Proper diversification eliminates asset specific (non-systematic) risk. But while diversification offers an easy way to stabilize long-term returns, it can often come at a hefty price. This is especially the case if the portfolio is made up of mainly stocks. This is because stocks typically have high correlations, meaning they tend to move up or down together.
To have good diversification, the correlation measure between two markets should be close to zero. This means the swings in one market won’t necessarily affect the other, and vice versa. A good example of this type of correlation is a portfolio that combines different asset classes such as stocks, bonds, commodities and precious metals, which typically have a correlation measure of between -0.5 and +0.5 to one another.
Why is it difficult to diversify?
The problem is, stocks and ETFs tend to have exorbitantly large capital requirements. Additionally, traditional futures products are often so large that achieving optimal diversification is not something the average retail investor can do. This is where the Small Exchange comes in, since its products are much more manageable in terms of size and cost.
Products on the Small Exchange are available with capital requirements of just 1 to 10% of the product value. This makes it considerably easier for traders to build a diversified portfolio without having to risk hundreds of thousands of dollars in exposure. Additionally, the Small Exchange currently offers products that would make for easy diversification since you can have a potential mix of equities, metals, and Forex in one portfolio.
Small Exchange Trading Hours and Market Holidays?
Learning the trading hours and market holidays is one of the first things a trader should do. After all, there can be no trading done outside of these hours. On the Small Exchange, all products are available to trade on weekdays from 7:00 AM to 4:00 PM Chicago Time (CT). By 6:30 AM CT, the markets will be available for pre-open quoting, and by 6:59 AM CT they enter a pre-open, no-cancel state.
As a U.S- based company, the Small Exchange will not be open for trading on the following U.S. holidays of this year:
Last Monday of May
July 4 (if on a weekend, it’s observed on Monday or Friday instead)
There are two types of memberships offered on the Small Exchange
Clearing Members – These are organizations that are interested in the Small Exchange’s products for their customers or their own trading desks. These firms must first register with the CFTC as a futures commission merchant (FCM) and be an approved clearing member with the OCC.
Corporate Members – These are non-clearing organizations that are interested in becoming Market Makers and offering the Small Exchange’s products to their customers or their own trading desks.
What about individual memberships?
Individuals do not need a membership to trade the Smalls, they can access the market simply through a broker that lists Small Exchange products. Individuals looking to reduce their exchange fees may consider subscribing to the exchange.
Pros and Cons of The Small Exchange
Simple, efficient futures trading – The Small Exchange offers futures trading with the simplicity of stocks.
Lower capital requirements – Products on the Small Exchange demand less capital than the average stock or ETF, which in turn means more bang for your buck.
Standardized products – Price movements in traditional futures can often swing too fast for the everyday trader and result in thousands of dollars of exposure in one day. The Small Exchange keeps things manageable with daily moves that typically range from a few bucks to a couple hundred dollars. Tick movements are also uniform and all contracts expire on the same day, every month.
Proprietary technology – With its own matching engine, the Small Exchange has already set itself apart from other exchanges and boasts the possibility of future technological advancements for the financial markets.
New exchange – With its official launch in June 2020, the Small Exchange is riding on a wave of expectations and all eyes will be on the company to see if it can actually deliver.
Limited products available to trade – With only three products available to trade at the start, the Small Exchange has a somewhat limited target audience. Though, the company has already outlined its plans to introduce more products in the months after its launch, so it’s only a matter of time.
Small Exchange F.A.Q
Is The Small Exchange Safe?
The Small Exchange may be new to the financial market but it is backed by trustworthy names in the industry with proven records in being reliable financial experts, market makers, and liquidity providers.
How Can I See The System Status?
You can sign up to receive updates from the Small Exchange or simply visit the Exchange Status to see if everything is working fine in real time.