Traders will soon have a new way to gain exposure to popular leading stocks like Nvidia and SpaceX without directly buying or selling the underlying shares.

The Chicago Mercantile Exchange (CME Group) is launching single-stock futures on Monday, offering investors a tool to hedge or speculate on over 50 large US-listed companies. These contracts are cash-settled, with the final payout tied to the closing price of the corresponding stock. They come with built-in leverage and are significantly less complex than options.

The world's largest derivatives exchange is betting that the current market environment, characterized by widespread retail trading and a scarcity of available shares in hot IPOs, will make this second attempt at single-stock futures a success. A similar product was launched in the US 24 years ago but failed to gain traction.

Where to start

Tim McCourt, CME's Global Head of Equity, FX & Alternative Products, said in a phone interview, "This product has the potential to attract a large number of new traders to our ecosystem." The exchange is targeting both retail traders, having already connected with over 35 retail brokers, and institutional investors like asset managers, offering them a new risk management tool.

Single-stock futures come with leverage but do not require an understanding of complex concepts like "the Greeks." Options require knowledge of parameters like Delta and Gamma, which explain how changes in stock price, volatility, time, and interest rates affect an option's price. Single-stock futures have no such barrier to entry.

Many newly listed, popular stocks have a very limited supply of shares available for trading. Single-stock futures can address this pain point. Investors who missed out on an IPO allocation can use these futures to take a long or short position in the stock with greater capital efficiency.

Martin Franchi, CEO of futures broker NinjaTrader, noted that retail traders prefer simpler instruments. "Single-stock futures are more straightforward and attractive to them compared to options. Many investors are confused by the various Greek parameters of options, while futures are simpler. Retail trading activity is now much higher, and the market environment for this launch is completely different from 24 years ago."

The launch of this new product comes at a sensitive time for CME. The war in Ukraine has boosted trading volume for Intercontinental Exchange's Brent crude oil futures, diverting some flow from CME's West Texas Intermediate (WTI) crude oil contracts. Meanwhile, overseas derivative exchanges like Hyperliquid are seeing increasing volumes, and alternative prediction platforms like Kalshi and Polymarket are rapidly gaining market share.

Extended trading hours

CME's single-stock futures will trade for up to 23 hours a day, five days a week, which is much longer than the regular US stock market session of 9:30 AM to 4:00 PM ET. Contracts are on a quarterly cycle and come in two sizes: a standard contract representing 100 shares, offered on 55 stocks, and a micro contract representing 10 shares, offered on 22 stocks. The coverage includes the "Magnificent Seven" tech giants, plus 15 other companies like Micron, Pfizer, and Walmart.

While equity index and commodity futures are globally popular, the history of single-stock futures in the US has been troubled. The category was banned for nearly 20 years. A regulatory agreement was reached in 2000, trading rules were approved in 2002, and the product was launched the same year, but it saw little trading activity and was eventually delisted in 2020. After the delisting, US regulators lowered the minimum trading threshold for single-stock futures in an attempt to revive the market.

For this new launch, CME has received approval from both the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC). Terry Duffy, CME Chairman and CEO, admitted on a quarterly earnings call in July 2022, "The product was a complete failure when it was first launched in 2002. But the entire market environment has changed dramatically since 2000."

India's success story

Single-stock futures trading is very mature in India, where local traders use them for leveraged bets on price direction, hedging stock portfolios, and capturing arbitrage opportunities across markets. Hedge funds in particular rely heavily on single-stock futures by buying the underlying stock and selling the future to lock in the price difference between the spot and futures markets.

Jeremy Cohen, Global Head of Derivatives at Stellar Securities, explains that European financial institutions use single-stock futures to optimise their balance sheets, especially for regulatory reporting periods at the end of a quarter or year. They also use them to manage long positions, hedge short risk, and lock in dividend volatility.

Any financial instrument carries inherent risks. Matt Cashman, Head of Investor Education at The Options Clearing Corporation, warns that trading during extended hours can lead to higher volatility, particularly around the dramatic price swings that often follow corporate earnings announcements. Trading costs also differ. Most US stock and options retail platforms are commission-free, making money by charging market makers for order flow. However, retail traders trading single-stock futures will generally need to pay a commission.

Stuart Kaiser, Head of US Equity Trading Strategy at Citigroup, believes the product's success will hinge on the promotional efforts of brokerage channels. "Retail traders are accustomed to using call options and leveraged ETFs for leverage. For single-stock futures to gain market share, discount brokers will need to heavily promote them and make them fully accessible to trading."