Stock index futures

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Stock index futures are traded contracts on the future movement of a (usually) widely followed and traded stock index. Trading on such contracts has become enormously popular in recent years with individual traders and investors since the introduction of the e-mini contract by the Chicago Mercantile Exchange (eventually CME Group, or CME).

Brief Background

The original intent of the stock futures markets was to allow portfolio managers to hedge positions in the stock market.[1]

Futures on equity indexes first began trading in the U.S. in 1982 when the CME launched its S&P 500 futures contract. Since then, the CME and the Chicago Board of Trade (CBOT), which offers futures on the Dow Jones Indexes, have remained at the forefront in creating similar products on a range of stock indexes. The two exchanges merged in 2007 to create the CME Group.

The CME began rolling out its suite of electronically-traded, small-contract 'E-mini' stock index futures in 1997. The exchange now boasts a 92 percent market share of index futures and options trading[2] led by the E-mini NASDAQ-100, the CME's fastest-growing e-mini index contract by trading volume. The E-minis, which trade at one-fifth the size of regular index-futures contracts, have been called one of the two most successful trading innovations of the past decade.[3]

Trading Index Futures

Stock index futures, especially E-minis, offer traders and investors a range of advantages, including extremely high leverage, no physical or electronic delivery hassles and the chance to trade the whole market in a single contract.[4]

Since introducing stock index futures contracts on other popular indexes like the Dow Jones Industrial Average and the small-cap Russell 2000 Index, exchanges have begun listing more niche-based products. These include the CBOE Volatility Index Futures, which track an stock index's volatility, and the Morningstar Style Index Futures, traded on US Futures Exchange, which track indexes by stock size and investment style.

Product Fingered In Market Decline Of May 6, 2010, But No Anomaly Found

Despite concerns that a sharp market decline on May 6, 2010 compared to that seen in the crash of 1987 may have been fueled by irregular trading in stock index futures, the CME said in a statement released on that date that trading by Citigroup Global Markets Inc. in its stock index futures markets did "not appear to be irregular or unusual in light of market activity" on that day. CME Group said that while its policy was not to comment on individual participation in its markets, it was releasing its statement about Citigroup "in light of volatile market conditions."[5]Citigroup also released its own statement, saying that there was no basis for rumors that it was responsible for a massive trading error on that date.[6]

References

  1. Traders Say Index Futures Will Snap Out Of Alignment. INO.com.
  2. CME E-mini Stock Index Futures and Options. CME.
  3. Stock Index Futures. Lind-Waldock.
  4. Stock Index Futures Trading Guide. tradersvic.com.
  5. CME Group: No irregular trading by Citigroup. MarketWatch.
  6. Citigroup Says Rumors Of Trading Error Untrue. Reuters.