The world of futures contracts can seem complex and costly, creating a high barrier to entry. However, a new product, Spot-Quoted futures aim to challenge that. SQFs offer a more accessible way to participate in the futures market, especially for those new to futures trading.
Spot-Quoted futures (SQFs) provide an innovative way to access futures trading by combining the direct pricing of
What Are Spot-Quoted Futures?
Spot Quoted futures are a new type of futures contract from the CME Group, which operates the world’s largest futures exchange. SQFs are designed to make futures trading more intuitive by pricing contracts at or near the current (spot) price of the underlying asset.
With SQFs, additional charges relating to the cost of holding positions are reported separately. That results in the price of SQFs being more in line with the market price of the underlying instrument compared to traditional futures where carry costs are incorporated into the price of futures. SQFs therefore, reduce the complexity associated with complex pricing elements found in traditional futures markets such as
How Do Spot-Quoted Futures Work?
Spot-Quoted futures are designed to reflect the price of an underlying asset and are cash-settled daily. This means daily realisation of any profits or losses, with positions reset at the settlement price for the next day.
Tracking the price of an underlying market price in this way may appear similar to how stocks or ETFs work. With a key feature of SQFs being that at the end of each trading day, any profit or loss is realised, meaning it is added to or subtracted from your account balance. This daily settlement process simplifies the tracking process of your gains and losses which provides opportunities to manage your risk exposure. However, unlike stocks or ETFs, SQFs are derivative contracts and differ in structure, risk, and settlement.
Tip: The price used to determine the value of SQFs at the end of a trading session is the “
How Are SQFs Priced?
The price of an SQF is quoted based on the spot value of the underlying asset such as a stock index, currency, commodity, or cryptoasset which it follows.
Tip: By mirroring the spot price, SQFs offer a more straightforward pricing model.
SQF pricing differs significantly from traditional futures, where the price of the future incorporates additional factors such as financing costs, dividends (for equity indices), and other elements collectively known as the
What Is ADJ?
The Adjustment Mechanism (ADJ) is a daily adjustment applied to accounts which hold SQF positions overnight. The ADJ incorporates the accounting for real-world factors such as dividends, interest rates, or funding costs.
For eToro users, the impact of the ADJ is reflected by the application of a daily overnight fee in a client’s account. The technique for calculating the daily overnight fee differs between long and short positions and follows the methodology outlined below:
- Long positions: “eToro Holding Rate”* + benchmark = annualised rate / 365**
- Short positions: “eToro Holding Rate”* – benchmark = annualised rate / 365**
*The “eToro Holding Rate” can vary as it is calculated based on the daily ADJ of the CME.
**The rates shown above are annualised rates, divided by 365 to reflect a daily charge.
For more information on the applicable fees, please visit our website here.
Factors included in the ADJ include overnight interest charges on long positions, and potential interest credits on short positions. SQFs relating to stock indices will also factor in any dividends received on stocks which are part of that index. Combining fees as one element adds transparency to the trading process by allowing the price of an SQF to remain aligned with the spot price in the underlying market.
Tip: Reporting market performance and the cost of carry fees separately breaks down the different elements of P&L performance.
Examples of SQF Positions
Spot-Traded futures are a new type of financial instrument which means reviewing SQF trade examples can clarify how they function. Let’s consider a couple of scenarios.
Day Trade SQF
Suppose you buy one
Two-Day Trade SQF
- Let’s say you buy one contract at $6,250. The market closes at $6,350. The daily settlement adds $100 to your account. The next day, the market opens and the price later moves to $6,360 at which point you close your position. Your profit for that day is ($6,360 – $6,350) * $1 = $10. The total profit over the two days is $110 before commissions. The ADJ, a debit or credit reflecting financing costs, would be applied overnight. Once the ADJ has been applied, you will be able to establish your overall P&L on the trade.
- Let’s say you buy one contract at $6,250. The market closes at $6,150. The daily settlement deducts $100 from your account.The next day, the market opens and the price later moves to $6,140 at which point you close your position. Your loss for that day is ($6,140 – $6,150) = –$10.The total loss over the two days is $110 before commissions.The ADJ – a debit or credit reflecting financing costs – would also be applied overnight. Once the ADJ has been applied, you will be able to establish your overall P&L on the trade.
*The examples above are hypothetical scenarios provided for illustrative purposes only. They do not account for eToro’s commission fees, which apply upon both the opening and closing of positions for Spot-Quoted futures. For more information on fees, please visit our fees page here. Currency conversions may impact results.
What SQFs Are Available to Trade?
SQFs can track any underlying asset. Popular markets include SQFs which track major indices like the Spot-Quoted S&P 500 Index future or SQFs which track prices in cryptocurrencies such as Spot-Quoted Bitcoin future or the Spot-Quoted Ethereum future.
Before trading SQFs, it is important to familiarise yourself with the overall nature of the market, any specific contract specifications and
Tip: Check the eToro platform for the latest available instruments which can be traded using SQFs.
SQFs vs Futures vs CFDs
SQFs offer a distinct approach compared to traditional futures and CFDs. Let’s examine the key differences.
| Feature | Spot-Quoted Futures (SQFs) | Traditional Futures | CFDs* |
|---|---|---|---|
| Pricing Basis | Spot Price | Future Price | Spot Price |
| Contract Size | Smaller (typically smaller than micros) | Larger (Standard, E-Mini, Micro) | Variable |
| Financing Cost | Daily adjustment mechanism (ADJ) | Built into the contract price | Daily overnight fee/swap |
| Expiration | Annual | Quarterly or Monthly | No fixed expiry unless explicitly specified |
| Settlement | Cash | Cash or Physical | Cash |
| Traded on | Exchange-traded & centrally cleared | Exchange-traded & centrally cleared | Over-the-counter (OTC) |
*CFDs are not available for residents of Spain and Belgium
All three products involve leverage and carry a high risk of loss. Leveraged trading is not suitable for all investors. You may lose more than your initial deposit, particularly with Futures and SQFs. Ensure you fully understand the risks and consider whether the product suits your investment goals and risk profile.
What Are the Advantages and Risks of Spot-Quoted Futures?
Although there are advantages, all trading involves an element of risk, but there are also risk factors which are specific to the SQF market. You can use a trading journal to track your daily SQF settlements, monitor your performance, and refine your trading strategy.
- Smaller Contract Size: SQFs are generally smaller than even micro futures. This means less capital is required as
margin . - Pricing: The price tracks the familiar spot index, making it easier to understand.
- Transparency: The daily ADJ makes financing costs clear.
- Accessibility: Smaller size and transparent pricing lower the barrier to entry.
- Reduced counterparty risk: As exchange-traded products, they are centrally cleared, reducing
counterparty risk .
- Leverage Risk: SQFs are leveraged, magnifying potential profits and losses. It is possible to lose more than your initial margin.
- Price Volatility: All investing involves risk. SQFs track underlying instruments such as cryptocurrencies which are known for their high levels of price volatility.
- Liquidity: SQFs are an innovative new product and while the market is growing, there could be periods when trade volumes are low. This can result in lower liquidity and potential overnight price gaps.
- Holding Costs: The use of a daily ADJ simplifies reporting, but carry costs still apply and can accumulate over time.
Final Thoughts
SQFs are innovative instruments which resolve some of the challenges posed by traditional futures markets. Their transparent pricing and smaller contract sizes will, in particular, make futures trading more accessible.
While SQFs are designed to make futures trading more accessible, they remain leveraged products with substantial risk. It is important to ensure that you have a solid understanding of how they work before trading them.
Visit the eToro Academy to learn more about trading Spot-Quoted futures.
FAQs
- What does Cleared Futures Position Mean?
-
Each futures contract is centrally cleared by a central counterparty. This means that every such trade is guaranteed by a central clearing house, which is a different entity from the exchange. The clearing house acts as the buyer to every seller and the seller to every buyer, which mitigates the risk of one party defaulting.
- What other commissions and fees are associated with SQF trading?
-
Beyond the price of the contract itself, traders should be aware of transaction and other fees charged by a broker and understand that the spread between the bid and offer prices of any instrument represents a form of charge.
- What is the smallest size I can trade using SQFs?
-
One of the attractive features of SQFs is that they can be traded in small sizes and the Nasdaq 100 Index SQF can be traded as $0.1 x the size of the Nasdaq 100 Index.
- Are the overnight fees on long and short SQF positions the same?
-
No. The overnight fee charged on long SQF positions and credited to SQF short positions is calculated differently. To ensure price consistency between Spot-Quoted futures and the underlying spot market, CME applies a daily Adjustment Amount (ADJ) to open positions, accounting for factors such as dividends, interest rates, and funding costs. For eToro users, this ADJ is reflected in the form of a daily overnight fee:
- What is a quick way to know the difference between Point and Tick price moves?
-
When looking at the price display in the market page of an SQF, a “point” is the smallest possible price change on the left-hand side of the decimal point. A “tick” is the smallest possible price move on the right-hand side of the decimal point.
- What are contango and backwardation?
-
Contango and backwardation are terms which describe the relationship between the spot price and futures price of a market. If, for example, the US stock market is experiencing contango, the price of the Micro E-mini Russell 200 Index futures may be higher than the spot price of the Russell index. Conversely, in backwardation, the futures price can be lower than the spot price.
This information is for educational purposes only and should not be taken as investment advice, personal recommendation, or an offer of, or solicitation to, buy or sell any financial instruments.
This material has been prepared without regard to any particular investment objectives or financial situation and has not been prepared in accordance with the legal and regulatory requirements to promote independent research. Not all of the financial instruments and services referred to are offered by eToro and any references to past performance of a financial instrument, index, or a packaged investment product are not, and should not be taken as, a reliable indicator of future results.
eToro makes no representation and assumes no liability as to the accuracy or completeness of the content of this guide. Make sure you understand the risks involved in trading before committing any capital. Never risk more than you are prepared to lose.
Futures are complex instruments and come with a high risk of losing money rapidly due to leverage. You should consider whether you understand how futures work, and whether you can afford to lose more than your original investment.
Spot Quoted futures involve significant risk and are not suitable for all investors. You may lose more than your initial investment due to the underlying assets’ price volatility. Please ensure you understand the risks involved.
CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 61% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.