Fractional or penny priced futures or forwards?

Discussion in 'Order Execution' started by toonerdy, Aug 3, 2014.

  1. toonerdy


    Sharebuilder and loyal3 allow customers to own fractional shares of stock, which I imagine are legally implemented as forward contracts, which I further imagine are approximately hedged in aggregate by these sites. I am wondering if anyone does the same thing with futures or futures options.

    It seems to me that, depending on total transaction costs, such a service would allow retail traders to hedge more precisely and diversify more, which could potentially make commodities attractive to larger set of participants.

    Conceivably, such a serivce could offer further advantages by allowing trading at a smaller, decimal, tick sizes, making commodities a bit easier for retail traders to understand.

    I imagine such a service would make money through some combination of commissions, offering worse bid-ask spreads in cases when no other customer is has an open order that improves it, selling data, or selling the ability to use special order types. That service would also probably have to make all contracts cash settled and might need to develop a statistical model about how smart its customers are, to decide which side to take when hedging the fractional portions of the customers' contracts.

    An alternative ways to achieve similar results might be for some banks to register a much wider selection of commodity exchange traded products for the US stock exchanges than currently exist, but my uninformed impression is that is that the process for getting just one ETP approved in the US is very expensive and time consuming.

    I also assume that implementing such a service in the simplest ways would be illegal. Yet, I see that sharebuilder and loyal3 are able to advertise a similar service for stocks, so I think it's worth asking if any company has done the same thing for the CFTC side with commodities.
  2. Fractional shares of stock have been around a long time, from the days of DRIPs. They don't trade on the exchanges, but there's precedent for them existing for a long time. I'm less sure about futures, but you could always have some offshore bucket shop quoting bad spreads on a 1/10 or 1/100 of an ES contract and hedging their risks themselves. Finding the suckers, er, customers, is the hard part.