Click Here For Index Futures

Every morning, coffee cup in hand, Todd Brown parks himself in front of his computer 15 minutes before the futures markets open at 8:30 central standard time. He logs into his account at Zap Futures and prepares for action. His game is the Standard & Poor's 500-stock index futures contract, and his goal is to make $500 before 10 a.m. That's when he starts his real job selling software from his Houston home.

Like Brown, growing numbers of investors are using their PCs to get into the listed derivative markets. They're drawn by better trading sites, reams of free financial data, and plummeting commissions. Until recently, most of the online action focused on stock and stock-index options. In December, for example, Charles Schwab executed 10,000 online option transactions, nearly 50% more than a year earlier. But online futures trading is now taking off, thanks in part to the advent of smaller contracts aimed at retail investors.

PINT-SIZED. The most popular is the "E-mini," introduced by the Chicago Mercantile Exchange in 1997 as a pint-sized version of the S&P 500 contract. The E-mini is valued at one-fifth of the larger S&P contract (currently worth $318,500) and requires a margin payment of as little as $3,400 (vs. over $16,000 for its big brother). The E-mini trades on Globex2, the Merc's 24-hour electronic network. That means an order placed from a Web site can get executed in seconds. "We can connect orders directly with the Merc's trade-matching engine," explains Thomas Peterffy, CEO of Timber Hill Group, which offers online trades in the E-mini for $9.90 per contract.

The Chicago Board of Trade is making a similar pitch to small investors with the Dow Jones contract. Introduced in October, 1997, just months after the E-mini, the Dow Jones contract is worth 10 times the value of the average ($96,199 as of Jan. 11) and requires a downpayment of $4,800. But unlike the Merc, the CBOT has yet to allow online customers direct access to its electronic network--it doesn't want to steal business from the trading floor. You can place orders for the Dow Jones and other CBOT products online, but there's no real advantage over phoning them in to a broker.

The E-mini and Dow Jones contracts are simple directional plays, meaning they follow the market when it goes up or down. That differs from index options, which reflect market volatility and don't always mirror the underlying indexes. Transaction fees on futures are also typically less than alternatives such as Standard & Poor's Depositary Receipts, index funds that are traded on the American Stock Exchange. You'd have to buy 514 SPDRs to get the same investment exposure as one E-mini contract worth $64,000. But you'd have to put up half of the price of the SPDRs in cash and $117.50 in annual management fees.

Not surprisingly, online brokers are scrambling for E-mini action. William Kaiser, president of ZAP Futures, says about 25% of his S&P 500 customers have switched to trading the E-mini on Globex2, and "volumes are doubling about every three months." More than 30 firms offer online futures trading, and the growth has them working to improve their Web sites.

Before you set up an account, bear in mind that futures trading, particularly without a broker, is as risky a way to play the market as you can find. Futures contracts are leveraged, with margin requirements as low as 5%. So they are far more volatile than index funds or stocks. They also have more downside risk than stocks, funds, or options. The most you can lose buying stocks or put and call options on the S&P 500 is your investment. With futures, you're obligated to honor a contract. If the market moves against you, you have to ante up more cash to maintain your position, making your downside unlimited.

Because of the high risks involved in futures, the Commodity Futures Trading Commission requires brokers to check whether futures trading is a suitable activity for a client. Investors must sign a document acknowledging they can lose their entire investment and more. Since brokers are ultimately responsible for trades, most won't accept investors with a net worth of less than $50,000.

With each tick on the E-mini contract representing $12.50, split-second execution time is a major selling point for online brokers (table). ZAP Futures executes E-mini trades in two to three seconds, says Kaiser. It has three commission rates: $20 per contract for accounts over $100,000, $23 for accounts over $10,000, and $29 for accounts under $10,000. ZAP has some interesting features. For $250--less if you trade often--a month, the ZAP Total Trading Platform offers real-time quotes, commodity price charts, and news. You can also listen to a commentator in the S&P 500 pit at the Chicago Merc. Kaiser says hearing the bid and ask prices live is invaluable for determining the market's direction. But you'll need to be familiar with the language in the pits: "Offered at a half...half and a half paper...two even straight now."

Timber Hill boasts two-second execution times, but offers just three contracts: the E-mini; the Swiss-franc denominated Swiss Market Index; and the Dow STOXX 50, a large-cap European index. The firm recently began marketing its online service to retail customers and is beefing up its Web site. But don't go to Timber Hill expecting hand-holding. "We don't want people looking to us for advice online," says Vice-President David Downey.

Jack Carl Futures is an online up-and-comer. After some problems last year, its web site is vastly improved. The firm charges $25 for a day trade and $30 for an overnight E-mini order. If you want to talk to a broker about the trade, you pay $43.

The site offers a lot of free content, including news headlines, historical price charts, market commentary, and economic reports. As with most sites, the really useful stuff costs extra. You'll have to fork over $130 per month to get Signal Online, which provides the content for many broker Web sites, including sophisticated charts and portfolio management programs.

While Lind-Waldock, the largest discount futures broker, offers online trading, it would rather have clients maintain a relationship with a broker. That helps weed out inexperienced traders. Still, Lind knows the future is online and intends to launch an improved Web site in February.

Futures markets aren't for everyone. Fortunes can been made and lost, sometimes in seconds. But if you understand the risks, opportunity is now as close as your keyboard.

Before it's here, it's on the Bloomberg Terminal.