--OT--
beach, interesting article on Futures
Options Buzz: After-Hours Futures
Trade Is Thin but Telling
By Dan Colarusso
Senior Writer
8/13/98 6:15 AM ET
By day, Phil Sylvester trades in the Chicago Board
Options Exchange S&P 100 options pit, one of the
busiest trading crowds in captivity. But when he gets
home from the LaSalle Street trading floor, Sylvester's
day isn't necessarily over. He flips on his Globex system
and keeps a close eye on the after-hours S&P 500 futures
trading.
After-hours trading is "one of the greatest innovations" of
the market, he says. "It make you feel like you're not left
out to hang until the next morning." For Sylvester, the
Chicago Mercantile Exchange's Globex S&P futures
have become the ideal place to hedge his positions if
overseas markets are coming apart at the seams.
But as stock ownership has broadened, the morning
futures ticker on CNBC has become information
seemingly half the nation -- civilians as well as
professional traders -- digests with its Rice Krispies. It, in
a way, has filled the knowledge gap between the pros and
the masses. The odds are that if the market continues to
skitter along the precipice of danger, the masses will be
watching even more closely.
"Sometimes the overnight futures are misleading because
of the lack of liquidity. You see them down when you get
up and you want to slit your throat with a razor," said
Michael Schwartz, CIBC Oppenheimer's senior options
strategist. "But by about 9:10, they come in a little and
you realize you shouldn't give up your breakfast when you
hear these early numbers."
So if everyone is following this stuff, how accurate are the
futures indicators? It seems like the basic equation
works: S&P futures traders are speculating on the
movement of perhaps the most important market
benchmark. If futures are trading above fair value, there's a
strong chance the market will be up. The only problem is
that those numbers are based on the overnight Globex
S&P 500 trading -- the province of overseas traders and
Chicago "locals" with insomnia and some money to burn
-- that typically sees light volume.
"It's the difference between a stock being up three points
on 3 million shares or 30,000 shares," said Thomson
Financial analyst Jerry Hegarty, who admits to checking
the numbers each morning when he rises at 6:15 a.m.
"These things trade about 1,000 contracts overnight and
basically the whole market comes to look them when
they wake up."
Over the four weeks preceding Friday, the Globex S&P
futures traded an average of more than 3,000 contracts
per session. On Tuesday, however, that volume rose to
almost 9,000 contracts, the busiest Globex day in recent
history.
And that same day, the futures were indicating a disaster
-- and sure enough, the market was treated to a bloodbath
before rallying in the waning minutes. Wednesday
morning, the futures were up 8 and the market opened
almost right on the nose.
Hegarty is among the skeptics who say that overnight
futures trading volume is too light to be considered
indicative of the day's performance and worry that the
tenor of the market could be corrupted by a large player
"pushing" the contracts around. "If you came home short
1,000 futures, you could sell a 50-lot on Globex and take
the market down eight points," Hegarty said.
Others point less to possible shenanigans and more to
limited liquidity and the wide spreads it creates.
"Overnight trading is reflective of direction or sentiment but
not of magnitude," said Kyle Rosen, option strategist for
hedge fund Strome Susskind.
Even in an overnight futures market that has little breadth,
however, manipulation is possible but not necessarily
profitable, some users said. And even with the thin
trading, many say it's more than dependable.
Bill Bayer, a vice president at Chicago's PTI Securities,
a brokerage firm that specializes in options and futures
trading, relies on the overnight numbers and isn't put off
by the frequently low volume. "It is what the market is. It's
accurate," he said on Tuesday afternoon in the wake of
one of the more worrisome days. "If you don't have any
compelling reason to trade, there's no reason for volume.
But when there is a reason, such as Asia last night,
volume will increase. Volume indicated the kind of
morning we'd have."
Trader Todd Raarup of Arbitrade, a futures and options
trading group, agrees that trying to manipulate the
overnight session doesn't hold much profit potential for
most traders. "If a big trade comes in, it can move it, but if
there's a big downdraft in the middle of the night, no one
is going to buy into it," he said. "People see right through
it." In addition, it creates arbitrage opportunities for traders
who want to go the other way, Raarup said.
"Some people can get it going in one way on this volume,
but it doesn't necessarily stay there," said OEX trader
Sylvester. "I don't see that manipulation is worth anything
there. But you have to work your order."
So, Sylvester can check the S&P futures from 4:45 p.m.
ET until 9:15 a.m. ET the following morning, watching the
volume spikes that come with the market openings in
Tokyo or London. By the time he's ready to start his next
trading day, he has at least a clue of what to expect. "In
the morning, if you know they are down 15, it gives you
time to prepare." |
