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Futures - Volume
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Futures - Volume

  #1 (permalink)
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Futures - Volume

Hi there just wondering if someone can clarify some questions about futures, relating to volume.

Using two examples, Index futures and commodities futures.

Starting with index futures; say I have a chart up with an particular index and I have a simple volume indicator enabled. I know this sounds silly but, what volume am I actually looking at?

The index value is calculated by the price of the stocks included in the index, so, is the volume shown the buy/sell quantity for the total of these stocks?

Or is it the volume of the futures contracts?

Since the price is moved by the stock buy/sell volume, only that volume is relevant, so I assume this is what is shown?

Where is the volume derived from for commodities like crude oil? Is that moved purely by the number of futures contracts bought and sold?

Apologies for the newb question.


Last edited by Big Mike; July 27th, 2010 at 12:26 PM. Reason: moved to Traders Hideout
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  #3 (permalink)
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For all futures contracts, the volume shown is the volume of the futures contracts traded. For example, each of the four following transactions would be counted with volume 10:

a) trader 1 buys 10 contracts (enter long) and trader 2 sells 10 contracts (enter short)
b) trader 1 buys 10 contracts (enter long) and trader 2 exits a long position of 10 contracts (exit long)
c) trader 1 sells 10 contracts (enter short) and trader 2 exits a short position (exit short)
d) trader 1 exits a long positition of 10 contracts (exit long) and trader 2 exits a short poisiton of 10 contracts (exit short)

Although all the four cases are counted with a volume of 10, there is a difference

(a) 10 contracts are added to all open contract positions -> open interest increases by 10
(b) and (c) 10 contracts are transferred from one party to another -> open interest remains unchanged
(d) 10 contracts are removed form all open contract positions -> open interest is reduced by 10

Volume information is available immediately, open interest information is only available next day.

The volume of a futures contract has nothing to do with the volume of the underlying. So the stock volume is irrelevant for the volume shown for a futures contract. Also note that there are several contract months for each contract. So if you wanted to compare the volume of the futures contract to the volume of the underlying, you would have to add up all the contract months first.

In most cases the futures contract has a higher liquidity - higher volume - than the cash market. If you close your position prior to first notice / last trading date, a futures contract remains a financial transaction and you do not need to care about the physical delivery of the underlying. If you are active in the spot markets, you may need to stock what you have purchased, which makes cash transactions more complicated in the end.

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Thanks for your reply Fat tails.

So if I am trading index futures, the volume is irrelevant to the movement of the index, or is the index chart I am trading off somehow removed from the actual index, and only reflecting a value as it relates to futures contacts?

For example lets say the index is the total of the stock prices of 10 companies, and for convenience sake they are trading at $10 each. The index value is $100. The change in the stock price of the individual companies is what changes the index value. I was under the impression this is the value which drove the futures contract, in which case the volume of futures contracts would be irrelevant to the price movement of the index itself, and only relevant in terms of your ability to buy and sell futures contracts. What would be relevant in terms of price movement, would be the volume of the stock buy/sells. Something tells me I have this wrong?

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Your conclusions are correct and wrong. The relationship exists, but the inverse relationship might be stronger.

(a) The individual stocks can indeed move the index, for example if one of your 10 companies posts superior earnings, this will have an impact on the share price of this company, and also drive the index price pro rata.

(b) But please note there is also an inverse relationship! If there are bad economic news, institutional investors will not necessarily sell all individual stocks, but sell the index future. It is faster, easier and induces lower transaction cost, if you sell the futures. So the futures contract will eventually run ahead of the stocks, and the stocks follow the futures.

The relationship between stocks and futures contracts is established by professional arbitrageurs. So if the bad economics leads to a significant frop in the futures price, the arbitrageurs will step in and buy the futures contract and sell the 10 individual stocks. If they own the stock, this is easy, if they don't they must borrow them from somebody else. The stock selling can be seen, if you watch the NYSE tick index. Usually some of the stocks are being bought, and others are being sold. But when arbitrageurs step in, all of them would be sold at the same time. So the drop in futures prices increases temporariliy correlation between the stocks. This is also a sign that the futures contract has moved too far, and very low readings of the NYSE tick index can be used as a exit signal (for a short position) or a countertrend signal (for a long position), relating to the above example.

NYSE tick counts the difference between upticking (last tick was up) and downticking (last tick was down) issues.

So there is a mutual relationship between stocks and futures. To understand what is more important, look at the average daily volume traded durign the last 10 and establish the market value of this volume:

ES 09-10 (front month) 2,030,000 contracts * 1117 * 50 USD = USD 113.38 billion
NQ 09-10 (front month) 323,000 contracts * 1896 * 20 USD = USD 12.25 billion
TF 09-10 (front month) 157,000 contracts * 668 * 100 USD = USD 10.49 billion
YM 09-10 (front month) 144,000 contracts * 10518 * 5 USD = USD 7.57 billion
EMD 09-10(front month) 28400 contracts * 780 * 100 USD = USD 2.22 billion

-> Daily traded value for the main US index futures (front month) is about USD 146 billion per day.

I will now have a look at 5 of largest companies within the S&P 500 (companies are weighted by market capitalization). Cannot take the DJIA, because its structure dates 100 years back and does not reflect economic criteria such as market capitalization or freefloat. The five companies below represent about 11% or the S&P 500.

Exxonmobil 22,000,000 shares * 60.65 USD = USD 1.34 billion
Microsoft 63,000,000 shares * 26.20 USD = USD 1.65 billion
Apple 24,000,000 shares * 262.25 USD = USD 6.29 billion
Johnson & Johnson 14,000,000 * 57.70 USD = USD 0.81 billion
Procter & Gamble 9,900,000 shares * 62.70 USD = USD 0.62 billion

The daily traded value of these stocks is about USD 10.5 billion. If y make a quick and dirty extrapolation to
all S&P 500 issues, it will give me something like USD 100 billion. This estimate is inaccurate, for better figures you can study the link below. It puts the share turnover value for the Americas in June 2010 at USD 3,134 billion. Divide this by the number of working days (22), you get a daily volume of USD 142.45 billion. Again the Americas ínclude other countries, so if you put the US share at 70% you will get about USD 100.00 billion. This confirms the rough estimate.

Conclusion: The value of the daily traded futures exceeds the value of the daily traded shares. It is therefore more likely that the futures price impacts the stock prices than the inverse. In any case the relationship is reflexive or mutual, and the futures markets are likely to be the leaders for reasons of liquidity and simplicity.

WFE - Key market figures



Twiddle View Post
Thanks for your reply Fat tails.

So if I am trading index futures, the volume is irrelevant to the movement of the index, or is the index chart I am trading off somehow removed from the actual index, and only reflecting a value as it relates to futures contacts?

For example lets say the index is the total of the stock prices of 10 companies, and for convenience sake they are trading at $10 each. The index value is $100. The change in the stock price of the individual companies is what changes the index value. I was under the impression this is the value which drove the futures contract, in which case the volume of futures contracts would be irrelevant to the price movement of the index itself, and only relevant in terms of your ability to buy and sell futures contracts. What would be relevant in terms of price movement, would be the volume of the stock buy/sells. Something tells me I have this wrong?



Last edited by Fat Tails; July 27th, 2010 at 02:36 PM.
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Twiddle View Post
Thanks for your reply Fat tails.

Please remember to use the Thanks button


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Thanks a bunch Fat Tails.

That answers my question perfectly.

Cheers

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