I've been worrying about the chart below for over 6 months now – and here's why.
In my Commitment of Traders analysis of the equity indices (S&P500, NASDAQ, Dow, etc.) I've always used the large contract (SP) data to analyse what the Professionals are doing – and pretty much ignored the Emini contract (ES) and others. A larger data set and some back testing convinced me that the Commitment of Traders data for the SP contract was superior.
Emini Now the Largest Index Trading Vehicle (adjusted open interest, monthly)
Well, the chart above shows that over the last year the Emini has not only overtaken the SP contract but has now become the largest component of the equity index futures market with just over 50% of total open interest. And yes, I've adjusted all the contracts for their relative margin size – so the Emini open interest data is divided by 5 so it's directly comparable with the SP contract, etc.
So the question is – should I change my Commitment of Traders analysis from the large contract (SP) to the Emini contract (ES)?
In short, the answer is "No" and here's my reasoning.
Changing "Character" of the Large Contract (SP) Market
Large Contract Becomes a Position Trading Vehicle (SP monthly)
Over the last 10 years several things have happened to the large contract (SP) market:
- Trading volume peaked in 1998 and has been in a slow, steady decline ever since
- Trading volume moved to the Emini (ES) contract with its electronic trading, lower margins, 24 hour trading, etc.
- Turnover (ratio of volume to open interest) in the SP also declined from 8 to 1.5
- After 2003, volume traded started to peak every 3 months with contract rollover
- During contract rollover months turnover was approx. 2.0 and during the other months turnover was approx. 1.0
These last 2 points are critical – they show that the large contract (SP) has become the de-facto position trading vehicle. An SP position is entered and typically held for a month and only occasionally rolled over at contract expiry.
Success of the Emini Contract (ES) as a Day Trading Vehicle
Emini Contract Becomes a Day Trading Vehicle (ES monthly)
By contrast, the Emini contract (ES) has seen the following evolution over the last 10 years:
- Trading volume continues to grow steadily and is now averaging approx. 2 million contracts daily
- Emini (ES) trading volume is now 13 times larger than the large contract (SP) – adjusted for margin
- Turnover (ratio of volume to open interest) in the Emini has been steady since 2003 at approx. 18 times, and
- The quarterly volume traded peak with contract rollover (seen in the SP) is much less pronounced
So Emini (ES) turnover is approx. 18 times, compared with approx. 1.0 times for the large contract (SP) in non-rollover months. The Emini (ES) has become almost exclusively a day trading vehicle.
Differences in the ES and SP Commitment of Traders Data
Commitment of Traders and Professionals: Large Contract (SP) versus Emini (ES)
Lastly, the chart above shows my weekly Commitment of Traders chart and the Professionals' position. Normally I show the top pane with the large contract (SP) Professionals and as you can see it has relatively large and smooth swings. However, the bottom pane shows the Emini (ES) Professionals. The swings are a lot smaller and appear almost random, week-by-week. For me this shows that the Emini Professionals are less directionally committed and reinforces that the Emini is a day trading vehicle.
Conclusion: I'll be sticking with the Commitment of Traders analysis using the large contract (SP) data as I believe this gives me a better indication of the longer term direction of the equity indices.
