IG Group is buying The Small Exchange, a futures exchange in which IG previously held a stake from Foris Dax Markets Inc, the parent of Crypto.com. IG disposed of its interest at the same time that it announced its intention to acquire US-based options broker and educator, Tastytrade. A deal that concluded in July 2022. Foris Dax Markets acquired full control of the Small Exchange in March 2002.
What does the Small Exchange Trade?
The Small Exchange, which was founded in 2019, trades financial futures contracts on US treasury yields, over maturities between two and thirty years.
However, the contracts traded on the small exchange are well … small.
For example, the contract in the two-year treasury note yield has a notional value of just $3800, far smaller than the full-size contracts traded on the CME which have a notional value of $200,000.
Small Exchange had previously offered contracts over precious metals, tech stocks, cannabis, crude oil and the US dollar but these have now been withdrawn.
The Small Exchange is what’s known as a Designated Contract Market, or DCM, and is registered with the US CFTC or Commodity Futures Trading Commission.
The exchange lists 13 futures broking firms that can execute business on it, these include some familiar names to UK traders, such as Interactive Brokers, Gain Capital, Tickmill and ED&F Man Capital markets.
In common with most derivatives markets, the Small Exchange is an electronic trading venue and the exchange platforms support at market, limit, stop and stop-limit order types, between 7.00 am and 4.00 pm Chicago time.
Each contract has two delivery months trading at any one time and spread trading is available.
Why would IG buy back into the Small Exchange?
IG bought back into the Small Exchange to allow it to expand the range of products and services it offers to retail investors and traders in the U.S., where OTC CFD trading is effectively banned.
IG Group and its US subsidiaries are hoping to leverage the Small Exchange’s trading technology, which has been described as a world-class trading platform, risk-monitoring system and matching engine.
Tom Sosnoff, the founder, of Tastylive (which is now part of iG), said of the deal:
“We’re excited to have had the opportunity to re-acquire the Small Exchange,”
“The future of market structure in the US depends heavily on product innovation at the exchange level, and I’m confident we can build an exchange that will scale and become a market leader over the next decade.”
Does IG buying The Small Exchange deal make sense?
World-class platforms or not, the Small Exchange has hardly been setting the world on fire in terms of volumes or open interest.
According to the exchange’s own data, the busiest day over the last month, in its April two-year treasury note contract, saw just 59 contracts trade. And at the time of writing the open interest in the contract stands at just 255 lots. This in part is due to the CME introducing their own smaller contract sizes, such as the Micro E-mini S&P, a smaller version of the E-mini S&P, a smaller version of the S&P futures contract.
This, in a period that has seen unprecedented volatility in short-term US government bond yields.
IG Group can presumably see value in the Small Exchange, and given its low turnover, we must assume that they have acquired it at a bargain price, though no financial terms were disclosed. However, that raises the question of why they sold out of the business only a few years ago.