The Hidden Lever: How Contract Design Flexibility Shapes Regular Futures Contracts

Abstract

This study investigates the dynamic relationship between regular and flexible commodity futures, focusing on mini contracts, quality variations, and settlement modifications. Flexible futures target a broader audience than standardized regular contracts. Using a Difference-in- Difference (DiD) analysis on base metals (2004–2024), findings indicate that flexible contracts act as substitutes, reducing the trading volume of pre-existing regular contracts. However, the aggregate volume of both contract types significantly exceeds the original volume of regular contracts alone, suggesting these innovations expand the market to new participants like retail investors. Product innovation is essential for exchanges reliant on execution fees. While global volumes have grown, success depends on whether new contracts complement or substitute existing ones. Literature offers mixed views: some suggest substitution based on similar income streams or demand elasticity, while others find complementary effects where new products act as a gateway to the broader market.