Futures Rising

Terry Flanagan

Traders have turned to using futures and derivatives at an increasing rate as macro uncertainty lingers.

“Over the last 25 years, I’ve seen volatility increase and decrease in cycles, but the overall cycle is toward growth,” said one futures exchange executive. “You will continue to see growth. There are signs that the economy is strong, but the Fed will keep interest rates low through 2014. There are a lot of opposing factors in the marketplace. Those factors are what will drive the markets.”

When market volatility reached highs during the summer months of 2011, investors turned to options and derivatives to hedge risk on the underlying. All-time highs were reached by nearly all the trading venues during August. While the numbers dropped off thereafter, volumes continued to remain strong through the latter portion of the year and into 2012, where they are holding better than equities.

While interest rate derivatives volume has been weaker, commodities trading has remained steady.

“What’s been driving commodities is the risk of shortages,” said Neal Wolkoff, an independent consultant and former chief executive of the American Stock Exchange and ELX Futures. “Oil is driven by Iran, old is being driven by economic uncertainty and concern about the value of the dollar. Overall, there remains a lack of confidence because of MF Global.”

Total worldwide exchange-traded derivatives during 2011 was up 11% year-over-year, according to the World Federation of Exchanges. More than 24 billion derivatives contracts were traded across exchanges during the year, double from just five years prior.

“This increase in volumes seems logical given the high volatility of markets in 2011, which may have driven the need for hedging upwards,” said Jorge Alegria, chief executive officer of BMV’s MexDer, the Mexican Derivatives Exchange and chairman of the International Options Market Association.

The decline in market volatility and trading activity, while hitting equities trading the hardest, has also made its way to other asset classes, albeit to a lesser extent. Through the first two months of the year, average daily equities volume is at about 6.9 billion, down from 7.9 billion in 2011 and some 9 billion the year before that.

CME Group, although experiencing a decline from the same period a year ago, saw a 10% bump in average daily trading volume month-over-month, largely due to continued macro-economic unrest. February 2012 volume averaged 12.8 million contracts per day, down 13% from February 2011 — but up 10% from January 2012. Total volume for February was 255 million contracts, of which 83% was traded electronically.

The IntercontinentalExchange had similar results. ICE’s total futures volume in February 2012 rose 1% from February 2011 to 33.4 million contracts. Average daily volume was down 4% from the prior February and up 12% from January 2012.

The CBOE Futures Exchange posted its second most active month in its history, with 1.34 million contracts traded, up 70% from the same time last year. Nearly all of the activity can be attributed to CBOE Volatility Index futures contracts.

Market volatility was volatile for much of 2011, as the Chicago Board Options Exchange Volatility Index indicated. Two and three percent intra-day swings became the norm. The surges came in the wake of a slew of macroeconomic events, including the European debt crisis and the U.S. debt downgrade. The VIX reached a high of 48 on Aug. 8, 2011, as the markets reacted to the lengthy U.S. debt ceiling negotiations and the Standard & Poor’s downgrade of U.S. debt. Since late 2011 however, volatility has settled down and has remained in the high-teens and low-twenties. As of mid-day March 2, the VIX was trading at about 17.

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