Is it cool to trade futures again?

One of the hard parts about surveying a closed industry is the lack of meaningful data. If you talk with traders at different firms you get one of two different stories: 1) Everyone is killing it, or 2) Everyone is washing out. Their assessment of the state of the market reveals more information about the source than the market itself; the datapoints never give you anything more than an anecdotal view of the overall picture.

Trading volume is one of the few objective indicators of market health. In the following chart, the blue line plots the daily average trading volume for interest rate futures on the Chicago Mercantile Exchange (CME). The green line, on the other hand, plots the price of the SPY.

As you can see, the trading volume of the CME interest rate complex tracks the fortunes of the S&P 500 in an interesting way. Trading volume in interest rate futures crashes when the stock market crashes. The opposite occurs in the other direction: on the upswing, interest rate futures trading volumes and the stock market rise in tandem.

As such, both trading volume and the stock market are near the highs of our dataset (back to Jan 2008).

Why this relationship holds true is up for speculation. We can find periods when futures trading volume outpaced the stock market, like Spring of 2010 when the Greece crisis first metastasized. Likewise we can find periods where trading volume lagged the stock market. This occurred in early 2013 right before the “taper tantrum” brought trading volumes back into line with the stock market (we remember trading a LOT of contracts on May 22, 2013)

Stocks are generally inversely correlated with bonds in the long run, implying bond volumes spike when yields are on the rise. Given a buoyant stock market, the probability for a rate liftoff is always greater than 0. In that scenario, volumes should continue to increase in the interest rate futures complex.

This is good news for the few remaining market makers in the Chicago futures markets, where interest rate traders make up a large proportion of participants.

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* Methodology: The CME computes a daily average per month here. This series is fairly noisy, so we applied a 6 month moving average to that series to arrive at a daily average with a longer time horizon. This is a back of the envelope estimate of trading volume. A more accurate picture of trading volume could be obtained by looking directly at all nearby futures contracts, or nearby curves.

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