Trading of futures and options is on track to a record year, with higher levels of trading activity in many sectors, notably interest rate and equity index contracts, according to the FIA’s Will Acworth, who went over the volume numbers for the first nine months of 2022 in a FIA webinar titled, “Q3 2022 Trends in Futures and Options Trading” Wednesday. On the other hand, Acworth said, trading of agriculture, energy and other commodity contracts is down from last year, with lower volume in commodity futures offsetting a rise in the trading of options on commodity futures.
60.66 billion contracts traded in the first nine months of 2022, up 35.6% from last year, Acworth said.
That overall number was pumped up by the NSE of India, which offers relatively inexpensive options on equity indices. The exchange traded 26.4 billion contracts in the first nine months of this year, up 2.5 times from a year ago. But it is an outlier, Acworth said, and the FIA webinar would concentrate on the numbers from the rest of the world.
In North America (the U.S. and Canada), the overall level of trading has risen from last year, with the growth coming mainly from futures and options on equities, interest rates, currencies and other financial instruments.
Interest rate futures and options volume rose 16% on a global basis compared to last year; however, commodity futures and options volume fell 21%. Within the commodity complex, there has been a shift from futures to options on futures, and currently options are driving both volumes and open interest, Acworth said.
Equity Index Futures and Options
In the U.S., there has been a transition from “day trader exuberance” focused on single stock options, to index-oriented trading strategies, which resulted in a 16% rise in volume in equity index contracts and a 4% drop in individual equity contracts volume, Acworth said.
The SPDR S&P 500 ETF options is by far the top equity index contract, having risen 63.9% from last year, he said. The Cboe SPX options have also seen extraordinary growth this year, up about 69% from the same period last year. CME options on emini futures have seen similar growth, though from a much smaller base, and its recently introduced end-of-the-week options have exploded in popularity, Acworth said.
Index options in Europe are also up, but not as much as in the U.S., he added. Eurex has become the dominant exchange and offers the top equity index contracts in Europe. Equity index options at Eurex grew 24% in volume; however, single stock futures and options on Eurex were down this year.
Trading in the MSCI index products has been both large and fragmented, Acworth said. There are a handful of contracts with relatively high volume such as the emerging markets index futures on the Intercontinental Exchange, but there is also a large amount of trading spread across hundreds of futures and options based on MSCI indices listed on more than half a dozen exchanges.
There is a great variety in contracts in size, multiplier, net total return, and price return, Acworth said, making trading similar to “going to the cereal aisle in the supermarket and having multiple choices of different cereals for all tastes,” he said.
Interest Rate Futures
Interest rate futures and options volume during the first nine months of the year is up around 17% over last year, although open interest is down 17%, Acworth said. There are a few factors contributing to this trend, namely all the recent interest rate hikes and inflation; a sharp liquidity decrease in interest rate markets as an effect of higher volatility; and the Libor transition. STIRS volume was up 20% and open interest was down. Bond trading was up 14% and open interest was up 5%, he said.
In STIRS, the Fed Funds contract has “blown up,” he said. There is more activity at the short end of the curve, and there is strength in options, he added. In the bond futures markets, there has been a dramatic upswing in the U.S. short end contracts – the 2-year and 5-years. The Bobl and the Schatz have also seen a major increase in trading. Bond futures in the Asia-Pacific region are also up, but not as much.
In commodities, the volume trend has gradually been going down in the last couple of years. There has been a shift to options on futures lately. Overall volume in the top energy contracts has declined about 23% since last year. In Europe there has been a 43% decline, and open interest is down 12%, but “a big chunk of that is due to the Moscow micro Brent contract,” Acworth said.
The war in Ukraine has of course disrupted energy markets, in particular TTF trading in European gas. The TTF (Title Transfer Facility, a virtual trading point for natural gas in the Netherlands) has been the most widely used way to price gas futures, Acworth said. There has been a sudden drop in gas trading caused by the war.
In the carbon market, there is agreement that emission trading of carbon credits is the right way to incentivize industrial players to reduce their carbon emissions, Acworth said. ICE is the primary market for emissions trading in Europe, and volumes are down there because plants are not running at full steam and thus are not producing as much carbon as they had been. Meanwhile in the US a small but significant market has emerged for carbon offset credits. CME is the “first mover” in that space, Acworth said, with volume up seven times from a year ago, but ICE also started offering a similar set of products in May.
“There is a lot of interest” in offset credits, but the midterm elections could influence the appetite for them, he added.
In ag products, cotton options open interest has “exploded,” and the September high may have been an all-time high in OI, Acworth said.
In metals, nickel trading was hurt by the March LME incident in which the exchange stopped trading nickel temporarily. Overall volume in copper trading has come down.
Acworth said that, focusing on the regulated cryptocurrency exchanges, CME has a large suite of crypto futures, but the largest volume is in its original large-sized bitcoin contract introduced in 2017. In ether, “the merge” drove trading in September.
Acworth said the forces driving the share price of exchanges have changed over the years. “Ten years ago, the price was a function of volumes,” he said. “But exchanges have evolved. Now, less than half of exchange revenues come from the matching of trades.”
He also said it’s difficult to say how much of the equity options growth in the U.S. is still from retail trading, because the way we measure that trading is flawed. We use order size, but the problem is that technology now makes it possible for institutional traders to fill huge orders through algorithms.
“My sense is that overall retail exuberance has come down, but it has also shifted,” he said.