futures riding down the markets???

Discussion in 'Index Futures' started by Atlantic, Aug 30, 2001.

  1. Atlantic


    i wonder about the following:

    aren't (also) the futures a considerable factor, that contribute to the current downtrends?

    if so - i wonder, that there is no uptick rule for shorting futures.

    what do you guys think about this? as far as i know - the uptick rule for stocks was implemented to make it harder riding down a single stock. but futures ride down the whole markets - don't they?

    maybe i already sound a bit like sec - but all in all i wouldn't be surprised if things get restricted even more.

    or did i forget anything important - please tell me.
  2. tntneo

    tntneo Moderator

    It is not that easy to answer.
    But futures aren't the market you know. Therefore forcing futures down, as you imply is happening, would not force the market down.

    It is true index futures do influence stocks, which influence futures, and again, in a feedback loop.
    Maybe often futures are ahead of the moves but not always.

    Also, extreme moves are slowed by arbitrage : playing futures against the markets. Because index futures are derived from real indices, when the difference between the cash [present and actual value] and futures grows too much, automatic software will trade against the move.
    This is another example that futures are not the market and that trying to 'fake' moves on the futures is foolish and won't work.

    So futures are rather fair and are not driving the market down. The only effect you may see is when someone big knows he is about to sell a lot, then he may short the futures with volume. This gives you the feeling the futures are driving the market down, while in fact, this institution was to sell stocks anyway. But it is true, futures in that case will move first.

    Futures are not the cause : they are the symptom.

    I hope this helps a bit.
  3. tradex21


    Gerry875 It is important to note that for every futures contract their is a long and a short. Actually in my humble opinion futures are a more open and legitimate market than a securities market. They represent a balanced opinion and use function(hedging risk etc.). A securities "market" and initial offering are basically a tool to float funds. From the "Suckers":cool:
  4. Atlantic


    tntneo and tradex21 - thank you both

    of course - for every short there has to be a long - but isn't it mostly the same for stocks?

    what is the reason that the futures markets are not regulated by the sec? is it probably because the "normal" investor (the one who needs to be protected) is rather engaged in stocks than in futures?

    i am not an american - so i'm not totally familiar with that stuff ...
  5. dlincke


    Imposing a short sale rule on futures would be against the very nature of the instrument. A future contract represents an agreement to buy (long contract) or sell (short contract) the underlying instrument at a specific price at a future date. A futures trade is a purely contractual transaction and there's no logical reason why one party to the transaction should be discriminated against. Unlike with stocks, there is no transfer of ownership involved and therefore no need of borrowing anything to sell short. Such a rule would likely render most futures markets dysfunctional. Forward sales and all kinds of heding would be severly impeded and index arbitrage couldn't be carried out effectively anymore.
  6. The post above me sums it up pretty well but I'd like to add my own flavor to make it simple to understand.

    Futures were created as a hedge for huge corporations to hedge out risk. Just like an insurance company does. The grains were the start of the futures at the CBOT.

    When farmers had great prices in corn. It made no difference for them as they weren't able to sell their corn for 5 more months. They could hedge the price of corn though in futures markets.

    They would short the corn futures. Their market risk is now gone.

    If corn prices go down in 5 months. They make money on the short but lose in real life so it's hedged. If the price of corn goes up in 5 months they lose on the short but make the difference in the actual corn.

    S&P , DOW and other financial futures were created for funds to hedge their portfolios. An uptick rule would take away this value.

    The futures are there so they can short the market while not having to sell all of their portfolio.

    One of the reasons I stopped trading futures was the fact I realized they were no longer really being used as a hedging instrument. The insiders weren't using them to reduce risk but using their inside info to profit.

    This is something that isn't being done much also with futures now.
    This is starting to change now with a lot of new traders going to futures with the new rules. I might have to join them.

  7. tradex21


    Good reply posts by everyone in my opinion, but impression I would like to correct is their is a long and a short in all securities. If a stock has a share float of say 100,000,000 shares only about 8 to 18% might be out for loan to short sellers. Some stocks of late such as Worldcom and Cisco have had massive amounts out to "shorts".:)
  8. Atlantic


    thank you all for your replies. things are much clearer now for me.

    but the fact that futures aren't solely used for their original purpose - but also for pure speculation has of course it's benfits - i guess (higher liquidity, tighter spreads, ...)?
  9. Atlantic


    ok - just another amateurish question:

    it seems that futures-trading (for example the e-mini nq) has certain advatages:

    high leverage, no uptick-rule, no daytrading-rule, fixed spread (at least from 9.30 to 16.00) ...?

    who - or how many of you prefer daytrading stocks or futures - why?

    of course with stocks one has a greater choice - but imho it would (for me it IS) anyhow much better to focus on just 1 market.

    what i think to have noticed so far is, that intraday moves on the nq seem to be a bit "cleaner" (i.e. not so jumpy like most stocks) - what do you think?
  10. tntneo

    tntneo Moderator

    there are many advantages to futures.
    obviously following one market instead of many.
    but the killer is really commission and slippage.
    recently 1 contract NQ is about 800 QQQ shares [they both track Nasdaq 100, future value or cash value], buying 800 QQQ shares at IB does cost $6.5 and that's very very low cost.
    However, buying 1 contract at IB does cost only $2.95 !

    Slippage is much less too in normal market condition [whatever that means :)]. Within 10 contracts [8000 QQQ shares] it is equal to $10 per 800 QQQ shares equivalent, in other words : ridiculous.

    no up tick rule [well neither does QQQ, but stocks do of course].

    liquidity is massive if you count volume or equity value exchanged.

    if you are looking for leverage, NQ is also very good. You need around $5000 to be able to buy one contract. While the real value of the contract is about $30000. That's a 6 to 1 more or less margin. Recently it was even more.
    Margin is very interesting when you can trade. The high leverage should be avoided for newbies though. 6 to 1 is big and you need a cool head. If you daytrade only that's fine. Gaps are the real risk. So no overnight holdings unless you are well capitalized or very very good trader.

    I used to trade stocks but then got tired of all the scanning and extra work of top down analysis and swing trading scans. NQ is indeed pretty clean and many technical strategies work well with the futures market.

    Even better are the currencies in longer term trends, but that's another story. Futures are great for daytrading for INCOME.

    #10     Aug 31, 2001