Russell 2k iced at ICE

Stealing the Russell 2000 from CME was a huge boost to ICE in 2007, but CME’s suite of indexes makes it a better product to trade on CME.

The FTSE Russell Index family and its crown jewel, the Russell 2000 Index, are the best traveled indexes in the world. The Russell 2000 is a mid-cap benchmark equity index. It is arguably the last Home Run standalone product launched by the Chicago Mercantile Exchange and it is coming home, as CME Group and Russell announced in April that the 2000 will once again be traded exclusively on Globex as of July 10 (except for expiring contracts on the Intercontinental Exchange (ICE)). 

The move will include six products: The E-mini Russell 2000 Index futures, options on E-mini Russell 2000, weekly and end-of-month options, the E-mini Russell 2000 Growth Index and Value Index. CME will also begin to list the Russell 1000 on an exclusive basis. 

 “The Russell 2000 is coming back to its natural home at the CME,” says Tim McCourt, global head of equities at CME Group. “It has been missing from the CME portfolio.” 

Back around 2002, the Russell family of indexes launched an innovative project where they would license its indexes on a non-exclusive basis to any exchange willing to pay a fee. Several exchanges jumped at the chance. One of the issues for Russell, at the time, was that although the CME had made a huge success of the Russell 2000, its broad market benchmark Russell 1000 was not doing much volume there. This despite that the fact that more financial entities actually used the Russell 1000 as a benchmark for broad market performance than the S&P 500. The two indexes were highly correlated, approximately 99%, so it didn’t make much sense for a trader — even one who used the 1000 as a benchmark — to utilize the futures product to hedge when the S&P 500 was so liquid. 

While several exchanges jumped at the opportunity to list futures on its products, the liquidity remained with the CME. But in 2007, when the CME was doing battle with ICE with competing bids for the Chicago Board of Trade, Russell saw an opportunity. It still felt that the Russell 1000 futures was a viable product and needed to be promoted by an exchange not conflicted, so when the most recent license ran out, ICE and Russell entered into an exclusive arrangement for ICE to list the 2000. This was a huge boost to ICE, which up to that point was not considered a serious threat to CME’s bid, but this move would leave a mark. 

McCourt says that the move was not optimal for customers. “The futures volume has dissipated over the last decade and we are excited about rectifying that problem for market participants and for the index,” he says. “When you remove one benchmark from the others you lose the capital efficiencies; you lose the benefit of trading most of the U.S. benchmark products on one platform. There is a whole confluence of efficiencies that you lose when you take one of them out of the grouping.” 

When the Russell returns to Globex, traders will enjoy a 70% margin offset against the S&P 500 and a 65% margin offset against the Dow and Nasdaq 100 contracts, according to McCourt, who adds, “We are very excited to bring this contract back within the liquidity pool at CME to trade alongside other major U.S. equity index benchmarks. It will put those indices on a common 24-hour platform and also introduce capital efficiencies.”

Professional trader Morad Askar of FuturesTrader71.com is happy to see the move. “I didn’t like it when it went to ICE in 2007,” Askar says. “As a CME member I was trading at membership rates and it [offered margin offsets] with other index products. When it went to ICE it became a lot more expensive.”

While member rates and margin offsets are a big draw, Askar says that the data fees are also less expensive for retail traders — many of the customers of his educational services — on CME than ICE.  “For someone who is a non-professional it is $5 a month; it is not $110, which is what ICE is charging for real-time data. For the average prop guy it doesn’t matter, just a couple of points on the E-mini S&P 500, but for people who want to come into the industry, it adds up.” 

McCourt says that the synergies with existing products and the CME’s ecosystem makes this addition greater than the sum of its parts. “When you look at our ecosystem, we have a very diverse customer base, we are open 24 hours a day, six days a week and are offering the ability for U.S. and non-U.S customers to trade CME,” he says. “Whether it’s asset managers who just need their benchmarks, hedge funds or options traders looking to hedge their exposure, we offer a more robust trading experience that lends itself to more trading opportunities.” 

For an index that has been well-traveled over the years, the Russell 2000 is returning home, which should be a benefit to traders who utilize the entire suite of equity index products.