STOCK INDEX FUTURES (SIF) ARE:

A stock market index represents the value movement

of a portfolio comprised of a set of different stocks.

• Therefore a stock index

futures contract is a
futures contract to trade
the face value of a stock
index.
• The most actively traded
are the American S&P’s
500 Index, FTSE100, Dow
Jones 30 Index.
COMMON FEATURES OF SIF
CONTRACTS:
Contract specifications
Exchange
Quantity
Delivery months
Delivery specifications
Minimum price movements
 Table 9.3
Summary of Key Stock Index Futures Contracts
Contract Exchange Currency Contract Size Index Compo- Index TABLE 9.3
sition Calculation
DJIA CBOT U.S. 10  Index 30 U. S. Price
INDICATES THAT
blueBchip weighting (no
dividends) THE TOTAL
Nikkei 225 CME U.S. 5  Index 225 Japanese
first section
Price
weighting (no VALUE OF A
NASDAQ 100 CME U.S, 20  Index 100 NASDAQ
dividends)
Modified FUTURES
e-mini stocks Market cap
weighting POSITION
250  Index
S&P 500 CME U.S. 500 mostly
NYSE
Market cap
weighting DEPENDS
(no dividend)
S&P 500 CME U.S. 50  Index 500 mostly Market cap ON THE
e-mini NYSE weighting
(no
dividends)
CURRENCY,
FTSE 100 Euronext British 10  Index 100 large
British
Market cap
weighting
THE
(no
dividends)
MULTIPLIER,
DAX 30 EUREX Euro 25 x Index 30 German
blue chip
Total return
AND THE
CAC 40 Euronext Euro 10 x Index 40 French
blue chip
Total return
LEVEL OF
DJ Euro
Stoxx 50
EUREX Euro 10 x Index 50 European
blue chip
Total return
THE INDEX.
Note: Some stock index futures trade on both U. S. and non-U.S. exchanges, and some non-U.S.
markets dominate in certain contracts.
INDEX ACRONYM DESCRIPTION
30 large U.S. companies. Price-
Dow Jones Industrial Averages DJIA weighted index. Dividends are not The various
included
Largest Japanese firms. Price-
indexes use
Nikkei 225 Nikkei 225 weighted index. Dividends are not differing
included computation
Market Capitalization (value) Weighted
S&P 500 S&P 500
Index. Dividends are not includes al methods.
British 100 index. Market Capitalization
FT-SE 100 FT-SE 100 (value) Weighted Index. Dividends are
not includes
German index .Total Return index that
Deutscher Aktien 30 DAX 30 includes capital gains, dividends, spin
offs, mergers etc
French index Total Return index that
Compagnie des Agents de
CAC 40 includes capital gains, dividends, spin
Change 40
offs, mergers etc.
Total Return index that includes capital
Dow Jones Stoxx
gains, dividends, spin offs, mergers etc
 Pricing of SIF
SIF • Trades in full carry market*
• Explained by the cost-of-
SETTLEMENT carry model
PROCEDURE • Futures price have to =
Spot price + any other
• Normally settled for carrying charges
cash delivery
• Otherwise, there will be
(instead of physical
arbitrage opportunities
delivery of an
underlying asset)
*A futures market in which the price
• Seller does not
difference between contracts with 2
deliver physical different delivery months equals the
shares or securities full cost of carrying the commodity
certificates. from the delivery month of the 1st
contract to the next.
SIF THEORETICAL
(FAIR PRICE)
VALUE
Price of stock
+ Interest
– Futures value of
Observations of
dividends discrepancy between
Fair Price actual & theoretical
futures prices of SIF…
…Estimation errors of
assumed variables
e.g. dividend yield,
interest rate…
FINANCIAL SYSTEM OF MALAYSIA
• The Malaysian financial system is structured into two
major categories: Financial Institutions and Financial
Market. The Financial Institutions comprise Banking
System and Non-bank Financial Intermediaries.
• The Financial Market in Malaysia comprises four major
markets namely:
• Money & Foreign Exchange Market,
• Capital Market,
• Derivatives Market, &
• Offshore Market.
FINANCIAL SYSTEM OF MALAYSIA
MALAYSIAN DERIVATIVES MARKET
Bursa Malaysia Derivatives (BMD) offers products that cover 3
different market segments namely: equity, financial and
commodities. Currently, the products are:
• Kuala Lumpur Stock Exchange Composite Index (KLSE CI)
Futures (FKLI),
• Kuala Lumpur Stock Exchange Composite Index (KLSE CI)
Options (OKLI),
• Crude Palm Oil Futures (FCPO),
• Crude Palm Kernel Oil Futures (FPKO),
• 3-month Kuala Lumpur Interbank Offered Rate (KLIBOR)
Futures (FKB3)
• And Three-, Five- & Ten-year Malaysian Government
Securities (MGS) Futures (FMG3, FMG5 & FMG10).
GLOBAL FUTURES & OPTIONS VOLUME BY REGION

SOURCE: FIA ANNUAL SURVEY 2013

EQUITY INDEX CHANGES: 2008-2013
GLOBAL FUTURES & OPTIONS
VOLUME

SOURCE: FIA ANNUAL SURVEY 2013

GLOBAL FUTURES & OPTIONS VOLUME
BY CATEGORY

SOURCE: FIA ANNUAL SURVEY 2013

GLOBAL FUTURES & OPTIONS VOLUME
BY REGION

SOURCE: FIA ANNUAL SURVEY 2013

TOP 20 EQUITY INDEX FUTURES & OPTIONS
CONTRACTS

SOURCE: FIA ANNUAL SURVEY 2013

MARKET IMPERFECTIONS & STOCK
INDEX FUTURES PRICES
4 market imperfections
could affect the pricing Market imperfections exist and can
of futures contracts: be substantial, particularly for
1. Direct Transaction indexes with large numbers of
Costs stocks.
2. Un-equal The existence of market
Borrowing and imperfections leads to no-
Lending Rates arbitrage bounds on index
3. Margins arbitrage.
4. Restrictions on So the price has to get out of sync by
Short Selling a good bit to cover the transaction
costs and other market
imperfections associated with
attempting the arbitrage
 PROGRAM TRADING
• To perform index arbitrage, an investor must
buy or sell all of the stocks in the index.
• E.g. to perform index arbitrage on the S&P
500 index, we would need to purchase or sell
500 different stocks.
• Because of the difficulty in doing this, the
trading is frequently done by computer i.e.
program trading.
• A computer will download the prices of all
500 stocks; compute & compare
the index’s fair price to the price
of the futures contract.
PROGRAM TRADING
• If a cash-and-carry arbitrage is suggested,
the computer will initiate trading to
purchase all 500 stocks. It will also sell the
futures contract.
• Performing a successful index arbitrage
requires very large sums of money, besides
very rapid trading, because it involves huge
number of stocks.
• As such, index arbitrage is typically engaged
only by large institutional investors (e.g.
mutual funds).
THE GROWTH OF HIGH FREQUENCY TRADING
Technological “All firms that connect directly to
advances has CME's trading computers are
caused investment able to get information ahead of
firms to upgrade the market when their trades are
trading platforms… executed” (WSJ, 2013)
2006: A N U N FA I R
1/3 of all A DVA N TAG E ?
European …OR A FAC T
Union & OF LIFE?
United A Chicago-based Trading Group
States views the data-feed lags as a
stock
trades were "fact of life," not an unfair
driven by advantage, because any
automatic firm trading in milliseconds
programs.
can take advantage of it if
they build their systems
properly.
http://online.wsj.com/articles/SB10001424127887323
798104578455032466082920
 LIKE ‘A TAX ON OTHER
TRADERS’ BECAUSE "YOU GET
ALL THE GAINS FROM BEING
THE FIRST GUY" TO TRADE.
~ PETE KYLE, A FINANCE PROFESSOR AT THE
UNIVERSITY OF MARYLAND (AND FORMER
MEMBER OF THE COMMODITY FUTURES TRADING
COMMISSION'S TECHNOLOGY ADVISORY
COMMITTEE)

‘A Chicago trading firm says it

recently detected delays between the time
it received confirmations of trades and
the time the CME published the
information on multiple futures contracts
covering thousands of trades.
For 2 weeks in late December &
early January, the firm detected an
average delay of 2.4 milliseconds for
silver futures, 4.1 milliseconds in soybean
futures and 1.1 milliseconds for gold
futures.’ (WSJ, 2013)
HOW HIGH FREQUENCY TRADING AFFECTS A
MARKET INDEX
HTTP://WWW.NATURE.COM/SREP/2013/130702/SREP02110/FULL/SREP02110.HTML

In a study of High frequency analysis of the relationship

between an index and its constituent stocks, results indicated
that in short time scales the influence of stocks is stronger than
the influence of the index.

High frequency players can thus take advantage of this

difference in time scales and manipulate the market.

One way to deal with the issue is to publish the index price
more frequently, e.g., every second.

Alternatively, this issue can be resolved by introducing

limitations on the frequency of trading (e.g. by means of
transaction fees, order fees, limit of number of allowed orders,
etc.) to that of the publication of the index.
MAY 6, 2010 FLASH CRASH
HTTP://EN.WIKIPEDIA.ORG/WIKI/2010_FLASH_CRASH

“High Frequency Traders exhibit trading patterns inconsistent with the traditional
definition of market making. Specifically, High Frequency Traders aggressively
trade in the direction of price changes. This activity comprises a large percentage
of total trading volume, but does not result in a significant accumulation of
inventory.

As a result, whether under normal market conditions or during periods of high

volatility, High Frequency Traders are not willing to accumulate large positions or
absorb large losses. Moreover, their contribution to higher trading volumes may
be mistaken for liquidity by Fundamental Traders.
Finally, when rebalancing their positions, High Frequency Traders may compete
for liquidity and amplify price volatility.

Consequently, we believe, that irrespective of technology, markets can

become fragile when imbalances arise as a result of large traders
seeking to buy or sell quantities larger than intermediaries are willing to
temporarily hold, and simultaneously long-term suppliers of liquidity are
not forthcoming even if significant price concessions are offered.”
THANK YOU VERY MUCH!!