Modern Money SmartPod

From the team that produces Modern Money SmartBrief -- and more than 40 other newsletters for some of the most influential organizations in Finance -- it's the Modern Money SmartPod. The term "Modern Money" means different things to different people, so co-hosts Colin Hogan and Sean McMahon will be bringing you news and interviews from every corner of the financial services world. From securities, futures and options, to venture capital, asset management and consumer banking, there is a lot of ground to cover. This podcast will feature insights from key policymakers and C-suite executives from leading financial services firms. We’ll also hear from experts about how the way money moves is evolving rapidly -- on Wall Street AND Main Street. If you're looking for a fun and informative podcast that focuses specifically on the people, technologies and trends that are driving the future of financial services … this is it!

All Episodes

Modern Money SmartPod

CME Group's Tim McCourt talks Event-based contracts and Ether options

September 15, 2022 • SmartBrief • Season 2 • Episode 12

Tim McCourt, Senior Managing Director and Global Head of Equity and FX Products at CME Group, joins the show to talk about the launch of Event-based contracts. During the initial meme-stock frenzy, there were plenty of nightmare stories about retail investors getting in over their head with derivatives. Designed especially for retail traders, these new Event-based contracts are an easy-to-understand way for individuals to trade on daily up or down price moves in some of the world's most widely quoted benchmark futures markets, including the E-mini S&P 500, E-mini Nasdaq-100, E-mini Dow Jones Industrial Average, E-mini Russell 2000, crude oil, natural gas, gold, silver, copper and Euro FX.

Amid all the headlines about the Ethereum "Merge," McCourt also shares some of the details about CME Group's extremely well-timed launch of options on Ether futures.

Key highlights

3:00 - What are Event-based contracts?

5:12 - Solving a headline-grabbing problem

6:57 - Which markets do these Event-based contracts cover?

10:34 - A well-timed launch of Ether options

12:23 - The impact of the Ethereum "Merge" on Ether options

More resources

Learn more about Event contracts

Learn more about CME Group's Ether options

ION
Automation positively transforms the lives of people and business.

Disclaimer: This post contains affiliate links. If you make a purchase, I may receive a commission at no extra cost to you.

Sign up for Modern Money SmartBrief

Follow this show on Twitter @ModernMoneyPod

(Note: This transcript was created using artificial intelligence. It has not been edited verbatim.)

Colin Hogan 00:14

Hello everyone and welcome to the Modern Money Smart pod. I'm Colin Hogan.

Sean McMahon 00:18

And I'm Sean McMahon. How are you doing today, Shawn? You know, Colin, I'm doing okay. Just okay. Lots of chaos in the markets these days, maybe too much. But I'm excited about today's guest, Tim McCourt from CME Group, because Tim is going to talk about a new kind of product that might have one segment of investors, retail investors become more active in what otherwise might be a rather complex corner of the markets.

Colin Hogan 00:43

Tim is the Senior Managing Director and Global Head of Equity and FX Products at CME Group. And we're going to talk to him today about their launch of what's called Event-based contracts. And these contracts are intended to be a straightforward way for investors to trade some of the more widely quoted benchmark futures markets in the world.

Sean McMahon 01:01

Yet, we're talking about benchmarks like the E-Mini S&P-500, the E-mini NASDAQ-100, gold, silver, copper, and oh, yeah, crude oil and natural gas. It's not like those markets haven't seen some volatility lately. But anyway, I gotta say, I think these event based contracts are pretty cool. Because well, let's just say it. Simplicity is genius.

Colin Hogan 01:23

Yes, indeed. And a big feature with them is that they provide an opportunity for individuals to enter these markets with, shall we say, a clearer understanding of what they stand to gain or lose. We can all remember during the initial meme stock frenzy when we heard lots of nightmare stories about retail investors getting in over their head a little bit with derivatives. So these event based contracts can provide a nice alternative to those more complex products. But let's let Tim tell us more about that. But before

Sean McMahon 01:52

But before we hear from Tim, here's a quick word from the sponsor of today's episode: ION.

Advertisement 01:57

Are you looking to grow your trading volumes? Are you held back by time consuming manual tasks and processes or stretched resources? Look no further. ION provides innovative solutions for financial institutions trading in equities, fixed income, foreign exchange, cleared derivatives and secured funding. ION’s award winning transformative technology changes the way you work. We automate tasks, processes and systems to simplify complex protocols, boost efficiency, and put greater intelligence in your hands. For more information or to book a demo, visit www.IonGroup.com/markets or click on the link in the show notes.

Sean McMahon 02:45

Hello, everyone, and thank you for joining us for today's episode of The Modern Money Smart pod. Colin Hogan is here joining me as our co host, and Colin and I are very excited to welcome as our guest, Tim McCourt from CME Group. Tim, how you doing today?

Tim McCourt 02:58

Great, Sean, thanks for having me on. Looking forward to today's conversation.

Colin Hogan 03:01

It's great to have you with us, Tim. So we'll just start and we'd love to hear more about these event based contracts. So what can you tell us about what they are and what role they serve?

Tim McCourt 03:09

Yeah, thanks, Colin. Well, at CME, we're excited to introduce our event contracts, which are a $20, increment, daily expiring product that allow market participants to trade their views on the daily upper down price moves of some of the most widely watched benchmark markets out there across equity indices, energy markets, metals, and foreign exchange. It's really exciting. And I think one of the things to note that I personally think is innovative for these event based contracts are the risk is limited to the amount people trade at the onset of their position. So think of these kinds of yes or no questions out there is the NASDAQ 100 future going to close higher today? Yes, and you're gonna see that on the screen, you can buy that contract, you know, what your expenses to get into contract, you know, what your fixed $20 payout is. So it makes these markets really digestible for those individual participants out there, and the market enthusiast in general.

Colin Hogan 04:04

So then, you know, how did these work? And how do they differ perhaps from from other contracts or other futures people might buy?

Tim McCourt 04:11

Yeah, that's a great question. The biggest difference I would say is that it's a fixed $20 risk increment for this trade, and it expires daily against the underlying futures contracts daily settlement price. So this event contract is tied to the futures market. So that's something that's similar. It's the same settlement price that you're going to see at the end of the day, or midday depending on which contract you're looking at. But what's different is that bite sized, fixed $20 increment. For your expression of risk, it makes that much more digestible makes it much more approachable. And it's a known risk parameter when you're entering that trade. Unlike futures or even options, which may have an unknown payout profile. When that contract is settling. This daily expiring event contract is a known and fixed payout. Therefore fixed risk when you're entering into that trade. We Just makes it just easier, more approachable, more digestible, and rice sized for that individual trader out there looking to get involved in some of the world's most exciting markets, but or maybe on a smaller scale and a $20 increment.

Sean McMahon 05:12

I've reviewed some of the collateral, you and your team pushed out about these contracts before they launched. And, you know, I gotta say, it kind of sounds like you're trying to address a market need for retail investors, right, we kind of had a lot of nightmare stories back during the meme trading phase, you know, trading phenomenon about traders who didn't really understand what they were on the hook for. So is that one of the problems you're trying to solve with these contracts?

Tim McCourt 05:32

You know, when we're developing contracts here at CME, it's really always in response to clearly articulated customer demand. And some of that we've seen over the last several years is a continued upwelling of demand and interest in smaller size, more approachable contracts. So just like our micro sized products, which has been phenomenally successful at CME Group, our event based contracts are expected to further expand the reach of our benchmark products to those individual traders who are interested in the markets. But I think maybe even more importantly, may have never traded in our markets before. So you know, Shawn, and Colin, some of the things we're talking about are people who've been watching the markets, but maybe they've been a little bit shy to get involved in futures market, or even the Microsoft contracts still might be too large for them to dabble or to educate themselves with real time trading. So this is a great way to make some of the world's biggest and best known markets more approachable to those individuals, traders. But in a way that's comfortable, you know, the risks you're getting into, that payout is fixed at $20 per contract per event based contract that's trading. So it's just a known risk profile. It's a known trade. And you can avoid some of the other product characteristics that are out there, whether it's the futures payout, options, payout, ETFs, single stocks, all these things are a little bit unbounded, in terms of the risks you may be entering into. This is a known risk trade $20 per contract, which makes it super friendly, and frankly, super easy for folks to understand what they're trading.

Colin Hogan 06:57

So which markets do these contracts cover? Then? How broad do you go with this? And why have you chosen these markets?

Tim McCourt 07:04

Excellent question, Colin. So we're starting with 10 event contracts across four asset classes are four markers. So we're gonna have four equity index contracts across four major equity, global benchmarks, that's the s&p 500, the NASDAQ 100, the Dow and the Russell 2000. And then when we look at some of the other popular markets, we have metals, contracts on gold, silver, and copper in the energy space, we're doing WTI, crude oil and natural gas. And then for foreign exchange, we're doing Euro US dollar. So why we chose these, these are some of the most 10 most popular futures based products and CME Group, across all over the exchanges in the products that we offer. As well as there's some of the ones that are most widely followed. When you think about what people are following for their personal accounts. Even if they're not trading futures. Everyone's looking where futures are moving pre open during the day. WTI is a leading benchmark for the energy sector, Euro USD in this market, certainly foreign exchange has become a popular trade over the last several months with the activity we've seen there. So these are markets that people are already familiar with already watching. And now you can trade them if this is your first time getting into the futures market at CME or if you're already an active trader, this is just another way to express your daily views if you think markets are going up or down, and a daily expiring contract with that yes, or no mentality, which I think just makes it very interesting and complementary to some of the other things that even active traders in our markets might already be trading.

Sean McMahon 08:32

So you get any feedback from traders about these contracts.

Tim McCourt 08:35

I mean, it's hard to say if it's going to be successful, but the feedback has been positive, people are excited, you know, these are launching on September 19, we're excited to see them come to market, something that we've been working on for several months. But you know, my crystal ball is broken. So I'm not sure what these will do long term. But certainly, I think a lot of enthusiasm around the contract both internally here at CME from the end users in the retail community, as well as all of our partners out there on broker platforms and our FCM and our clearing members. Everyone's really excited about this. And it's been a great team effort with all of our stakeholders internal and externally to get this this product ready for launch. So I'm excited to see what happens cautiously optimistic, but you know, it's hard building new markets. So we'll see what happens when everyone goes live. But I certainly encourage everyone to give it a shot and go to CME group.com to learn more. There's a lot of great collateral out there, Shawn, that you had mentioned before, the response has been really strong. And I'm excited to see how these things do.

Sean McMahon 09:31

Yeah, great. I'm at your excitement. I mean, I think this is a these are pretty awesome contracts that could bring traders into this that when the past might have been a little more confused by some of these things and just not understand how these markets work. This thing is pretty straightforward. And like you said the risk is pretty apparent and easily digestible, and hopefully more folks will come on board.

Colin Hogan 09:49

We'll be right back.

Advertisement 09:51

Imagine the trading volume growth achievable by working smarter. Let ION’s innovative financial technology bring your imagination to life. Automating the complete trade lifecycle for all asset classes, our solutions simplify complex processes, boost efficiency, and enable better decision-making. Together we will unlock your business potential. For more information or to book a demo, visit www.iongroup.com/markets - or click on the link in the show notes.

Colin Hogan 10:30

And now back to our conversation with Tim McCourt from CME Group.

Sean McMahon 10:34

I want to switch gears for a second. So you also folks at CME Group, we're always kind of coming up with new and creative products. And so the recent launch of ether options, what can you tell me about that?

Tim McCourt 10:44

Yeah, it's our latest and greatest product in our crypto portfolio here at CME. And what's interesting to note is we have a few other cryptocurrency products and we have Bitcoin and ether futures, both in standard size and micro size. We have micro sized options on ether, we have standard size options on Bitcoin. And what's interesting is ether remains very popular in terms of risk management in terms of hedging needs in terms of also accessing cryptocurrency products in a regulated manner regulated venues such as CME. And when we look at the last few weeks, there's been an upwelling of interest around ether, particularly given what's going on with the merge and the movement of proof of work to proof of stake. So it's something that the clients have really wanted us to introduce options on the larger size ether future. So that's the 50x future, you know, 50 times or ether US dollar reference rate. And while we had the micro size contracts out there already for options, people really wanted that larger size ether contract. So you know, like I said before, you gotta listen to clients, give the crowd what it wants. And so we rolled those out here at CME really just to better give another tool in the toolbox for people to better manage their risk around ether. And it's the latest and greatest products in our ever growing product portfolio here at CME for cryptocurrency. So it's something that we're proud of option, markets are always a little bit more challenging to stand up just because of the permutations of strike and explorations. But we've been working with market makers, we've been working with our liquidity providers, really strong market quality out of the gate, and people are optimistic about it. And these are available for both on screen trading, as well as block trading. So lots of ways to use these to manage people's ether related price risk for cryptocurrency.

Sean McMahon 12:23

Now, obviously, the merge, you mentioned that it's been in the headlines a lot lately. So how's that kind of impacted the launch of those contracts.

Tim McCourt 12:30

So when we look at the merge or the movement from proof of work to proof of stake, it really hasn't necessarily influenced or impacted our contracts are contracts are still financially settled here at CME Group, we settled to the CME CFB ether US dollar reference rate for both the standard size future the micro futures and therefore all the associated ether options. But what it has done, I think it has made market participants more attuned to some of that term structure risk. And I think that's why options are more important, what's going to happen with the merge what will happen the days, the weeks the months after. So people want to be more precise as you're managing some of their risks, whether that's hedging, or if they have, if they're entering into the staking of ether as a business opportunity. There's just a lot of things that folks are doing around this merge event, where they want to take some of that risk out of the equation in options are always a super useful tool to do that, in addition to how they're using our futures for accessing the markets or using futures for hedging options allow just different types, whether you're hedging different price points, different points on the calendar, or certain forward risk that you're looking to hedge options are a great tool for that. So I would say that's where we've really seen the change is people's being more tuned or more keenly aware that they want to precisely manage their risk. And doing so in a regulated way on our options on futures at CME is a fantastic tool for the market. And it's being you know, the feedback is strong, early days of trading. And we've seen great uptake in our micro ether options already around the merge the last few weeks. So I think this is something that we'll continue to see be a useful tool in the toolbox for all the crypto traders out there,

Sean McMahon 14:07

I gotta tip my hat to you because obviously, the date of the merge was a bit of a moving target. And you and your team kind of manage the time this one right about being on nail it.

Tim McCourt 14:16

So yeah, I wish I could take complete credit for that. But you know, the the technology rollout calendar sometimes is what it is, and just the stars aligned on this one. But we'll take it, you know, certainly advantageous for us to be able to get it out there just in time as this is happening. And the feedback from clients has been great so far, and excited to see what happens over the next few trading sessions.

Colin Hogan 14:35

So Tim, thanks for all this information. If people want to learn a little more about these or make sure they're fully up to speed on how they were working. They do that. How do you recommend they do that?

Tim McCourt 14:46

Yeah, thanks, Colin. And thanks for having me. Today. We covered a lot of ground on event contracts and either options, but if folks are interested in learning more about those products or any of the other products we offer here at CME Group, the best place to go is CME. group.com We have tremendous education know an informational resources on our website. And that's really the best place to go and learn more about our products and get in touch with those of us at the exchange. And we're happy to always follow up with listeners and customers and market participants out there and really excited about these product launches on the horizon. And stay tuned for more great things to come from CME.

Sean McMahon 15:17

Well, thanks for sharing your insights. Tim, this has been great. Hope you have a great day. You too,

Tim McCourt 15:21

Sean. Thanks again for joining Colin.

Colin Hogan 15:23

Thank you. That's our show for today. But before we go, we want to say one final thank you to our sponsor, Ion.

Sean McMahon 15:34

If you liked this podcast, please share it with your friends and colleagues. And be sure to follow us on Apple, Google Spotify, or wherever you get your podcasts. You can also follow us on Twitter, where our handle is @ModernMoneyPod. And if you'd like a daily dose of modern money news delivered to your inbox, head on over to SmartBrief.com and sign up for the Modern Money SmartBrief. The Modern Money SmartPod is the production of SmartBrief - a Future company