Traders Turn to Futures

Terry Flanagan

As volatility and global economic uncertainty came to a head over the past several months, many investors are turning to futures to hedge risk.

“Volatility is really what drives trading, in equities and in futures,” Neal Wolkoff, chief executive officer of ELX Futures, told Markets Media. “The greater the volatility of the underlying market, the greater the need to hedge price risk that comes from that. Volatility breeds hedging transactions. It has driven clients into futures. Volume has been good overall.”

The Intercontinental Exchange reported record futures trading volume for 2011, with average daily volume up 16%, and $26.2 trillion cleared in credit default swaps, generating record annual CDS revenues. ICE’s fourth quarter ADV in 2011 was 1.4 million contracts, up 12% compared to the prior year. ADV for the year was at 1.5 million contracts, up 16%. ICE Futures Europe and ICE Futures Canada established their fourteenth and third consecutive annual volume records, respectively.

CME Group also had a record year, with 13.4 million contracts per day, up 10%. Particularly successful were its foreign exchange, agricultural commodities, and energy and metals products.

Trading at the CBOE Futures Exchange also reached record highs in 2011. Total exchange volume during the year was at 12.04 million contracts, up 174% from the previous year. A significant portion of that was attributed to trading of its Volatility Index futures, which totaled 12.03 million for the year.

Market volatility was on a wild ride in 2011, as the CBOE Volatility Index indicated. Two and three percent intraday swings became the norm. The surges came in the wake of a slew of macroeconomic events, including the European debt crisis, the U.S. debt downgrade, and the collapse of MF Global. The VIX reached a high of 48 on Aug. 8, as the markets reacted to the lengthy U.S. debt ceiling negotiations and the Standard & Poor’s downgrade of U.S. debt. It then fluctuated from the low-30s to the mid-40s in the following months, surging as European debt concerns weighed on investors and declining as hopes for a potential resolution surfaced. In late October, the VIX had declined to as low as 25. As of mid-day Jan. 4, the VIX was trading at about 23.

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