Trading behavior in S&P 500 index futures

• Published date: 01 January 2016
• Date: 01 January 2016
• DOI: http://doi.org/10.1016/j.rfe.2015.11.001
• Author: Lee A. Smales

Trading behavior in S&P 500 index futures

Lee A. Smales ⁎

Schoolof Economics and Finance, CurtinBusiness School, CurtinUniversity, Perth, WA 6102,Australia

abstractarticle info

Articlehistory:

Received14 December 2014

Receivedin revised form 6 October2015

Accepted3 November 2015

Availableonline 10 November 2015

Thisarticle examines the determinantsof tradingdecisions and the performanceof trader types, in thecontext of

the E-Mini S&P 500 futuresand S&P 500 futures markets. Speculators and small traderstend to follow positive

feedbackstrategieswhile hedgers dynamicallyadjust positionsin response to marketreturns. Such strategiesap-

parentlyreverse during the 2008–09 financialcrisis. Investorsentiment and market volatilityplay an important

role indetermining the net tradingposition of tradersacross the sample period.While all trader types arebetter

at foreseeing market upturns, an out- of-sample test suggests that speculators and small traders have s ome

predictiveability for short-term marketreturns.

© 2015 ElsevierInc. All rights reserved.

JEL classification:

G00

G02

G10

G12

G14

Keywords:

Indexfutures

Trading behavior

Investorsentiment

CFTC

COT

1. Introduction

Following its introduction in 1982, the S&P 500 index futures contract

quickly became the most actively traded equity index contract in the

world, and the focus of much attention from the media, traders, and aca-

demics. Following significant increases in the standard contract size, as a

result of increases in the index value, the electronically traded E-MiniS&P

500 futures contract

1

was introduced in 1997. The establishment of this

E-Mini contract allows for the study of investor behavior across two

closely related equity index futures markets, and goes some way towards

exploring whether the introduction of the new contract was a worth-

while exercise for the Chicago Mercantile Exchange (CME).

While there is clear evidence (e.g. Karagozoglu and Martell, 1999;

Karagozoglu, Martell, and Wang, 20 03) that smaller contract sizes

have positive impacts on the market in te rms of increasing volume,

smoother trading, and encouragi ng more small traders to trade, the

literature onthe quality of open outcry versus electronic trading is not

so clear as to the preferred method. Tse and Zabotina (2001) suggest

that while electronic markets have lower bid-ask spreads,the market

qualityand trade informativeness aregreater in the open outcrymarket.

Pirrong (2003) arguesthat miscommunicationbetween tradersreduces

the efficiency of open outcry markets, while several studies find that

execution timeis reduced in electronic markets.Martinez et al. (2011)

suggest that transaction costs are hig her in an open-outcry market

and volumemigrates away as a result.Whatever the result fromempir-

ical evidence, it is clear fro m the migration to electronic exchanges,

which side of the argument is winning in the minds of the exchanges

themselves.

A literaturehas developed around sentimentindicators and invest-

ment performance. Clarke and Statm an (1998) find that the Bullish

Sentiment Index, a measure of the bullishness of newsletter wr iters,

does not have significant forecasting po wer. Fisher and Statman

(2000) consider the sentiment of newsletter writers, small investors,

and Wall Street strategists, while Simon and Wiggins (2001) use

market-basedsentimentmeasures, all of whichare found to be contrar-

ian indicators. More recently,Baker and Wurgler (2007) demonstrate

that waves of investor sentiment have clearly discernible,and regular,

effectson both individual firmsand the stock market as a whole. Anoth-

er approach has Brown and Cliff(2004) note that market sentiment is

driven mainlyby returns, but also by indicators such as thenet trading

position of investors.

The CommodityFutures Trading Commission (CFTC)has published

data on positionstaken by three types of traders–speculators, hedgers,

and smalltraders –in U.S. futures marketsperiodically since the 1980s.

Reviewof Financial Economics 28 (2016)46–55

⁎Tel.:+ 61 2 9266 1688.

E-mailaddress: lee.smales@curtin.edu.au.

1

A contract tradingwith the same underlying index as the original “big”contractbut

with a value per index point equal to 1/10th of the value of the larger contract—$50 v

$500.

http://dx.doi.org/10.1016/j.rfe.2015.11.001

1058-3300/©2015 Elsevier Inc. All rightsreserved.

Contents listsavailable at ScienceDirect

Review of Financial Economics

journal homepage: www.elsevier.com/locate/rfe