The world's largest exchange company is set to launch bitcoin futures this weekend, seeking to capitalize on the mania for the booming digital currency.
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Chicago-based CME Group Inc. will start trading of bitcoin futures at 6:00 p.m. ET on Sunday, one week after its smaller rival Cboe Global Markets Inc. debuted a similar contract. Cboe's futures sputtered in their initial week, creating an opening for CME.
Bitcoin has soared more than 1,700% this year and was trading at $17,575.79 late Friday afternoon, according to CoinDesk -- an extraordinary run-up that has lured investors world-wide. Futures on bitcoin allow traders to bet on whether its price will rise or fall, and they offer Wall Street firms a way to trade it on well-known, regulated markets.
But volumes on Cboe's bitcoin futures have dropped off precipitously since Monday. After more than 4,100 contracts changed hands on the first day of trading, volume averaged around 1,640 contracts the rest of the week -- a 60% slide. Cboe says its volumes are healthy for a brand-new product and expects them to pick up.
Compared with Cboe's bitcoin futures, CME's offering may appeal more to hedge funds and big financial firms and less to retail investors, some traders said. That is because of its larger size: each CME contract represents five bitcoins, whereas Cboe's represents just one. That means it will require more cash upfront to trade the CME contract.
But CME still faces many of the same hurdles as Cboe, including a reluctance by many banks and futures brokerages to touch the notoriously volatile cryptocurrency.
Conceived as a purely digital currency not backed by any government, bitcoin has gone from a curiosity beloved by libertarians and software geeks to a mainstream investing fad. But skeptics call it a bubble, and its reputation remains clouded by its association with money laundering and other illicit activity.
CME's heft and close ties to big trading firms could give it an edge over Cboe. But some of the largest banks and brokerages won't be providing their customers with access to CME's bitcoin futures, potentially putting a damper on trading activity.
JPMorgan Chase & Co., Royal Bank of Canada, Société Générale SA and UBS Group AG won't offer their customers access to CME bitcoin futures on Sunday, although they are monitoring the situation and could rethink their stance eventually, people familiar with the situation said. The same banks sat on the sidelines for Cboe's launch, according to the people.
All of them are so-called "clearing firms" at CME, meaning that they sit between the exchange and traders and help move cash from market participants with losing bets to those whose bets pay off. Bitcoin futures are risky for clearing firms because the extreme volatility of the cryptocurrency increases the odds of traders being unable to cover their losses. If that happens, the clearing firm itself can suffer losses.
"A lot of clearing firms were very nervous about this launch. They throttled back the risk quite a bit," said Joe Van Hecke, a trader at Grace Hall Trading.
Goldman Sachs Group Inc. and ABN Amro Group are clearing both CME and Cboe bitcoin futures but only for certain clients, representatives of the banks said.
Interactive Brokers Group Inc., a clearing firm and online brokerage, is offering access to both CME and Cboe bitcoin futures. In a disclosure form, it warns customers that trading bitcoin futures is "especially risky" and "there may be no fundamental or economic basis for valuation of Bitcoins and their prices may move randomly."
Popular retail brokerages Charles Schwab & Corp. and TD Ameritrade Holding Corp. said they were studying CME's bitcoin futures but wouldn't be allowing customers to trade them at launch. TD Ameritrade will enable trading of Cboe's futures starting Monday, a spokeswoman said.
Ally Invest, the online brokerage arm of Ally Financial Inc., said earlier this month that it would give its customers access to CME bitcoin futures "on day one," but on Thursday, an Ally spokeswoman said the firm was evaluating the situation and "cannot confirm the timing of availability to our customers."
A CME spokeswoman said a number of trading firms were ready to support its new bitcoin futures at launch.
Bitcoin's price swings led CME to rein in the riskiness of its new contract. On Tuesday, citing a "normal review of market volatility," CME raised the so-called "initial margin" requirement for its bitcoin futures to as much as 47% of the value of a contract for speculative traders, from 35% earlier.
That means such traders will need to deposit cash worth nearly half the value of the contract to place bets, effectively limiting the size of the bets they can place. By comparison, initial margin for CME's main oil futures contract is about 4%.
CME Group grew out of the famed Chicago Mercantile Exchange, which was founded in 1898 as the Chicago Butter and Egg Board. It now spans the globe and runs a broad array of markets in areas such as energy, metals and stock-market futures.
Meanwhile, Cboe, which runs the biggest U.S. options platform and started in 1973, has exclusive rights to key stock and equity-volatility contracts.
Only one of the two firms will end up with the dominant bitcoin futures market, due to the winner-takes-all nature of the futures business, market observers say.
"History tells us that the market will gravitate to one exchange," said James Angel, a finance professor at Georgetown University. "Whichever contract achieves critical mass will dominate the other one."
Alison Sider and Emily Glazer contributed to this article.