In a proverbial case of “Good News/Bad News” trading volume for the S&P/ Case Shiller (home price index) futures traded on the CME for 2012 was 83% higher than for 2011. As illustrated in the table to the right there were 357 trades (with notional value of ~$10mm) during the year, up from 195 in 2011 and far fewer in 2010.
While that’s good news, it’s still a far cry from a level that would entice some institutional account from putting their toe in the water. That said, as I get feedback from accounts, I feel that we are one trade away from waking up some morning to find that 100 (or 500?!?) lots have been crossed between a buyer and seller who each appreciate the attributes of a publicly-priced, exchange-cleared contract, on the benchmark home price index.
While volume improved from 2011 to 2012, the uptrend slowed in the second half of the 2012. Trading volume slowed from 267 contracts in the first half of 2012 to only 90 since June 30th.
My sense is that couple of factors influenced the numbers:
- The turn, and jump in CS indices after May resulted in wider bid/ask spreads, as traders became more cautious. Wider bid/ask spreads tend to discourage traders who are concerned about market liquidity. While I strived to populate bid/ask quotes in all 121 permutations of regions and expirations through the summer, I decided to narrow my focus during the second half of the year. I would imagine that seeing some contracts with no quotes discouraged some potential traders.
- Some participants that had been more actively involved in posting quotes seemed to drift to the sidelines. While this is somewhat a corollary of the first reason, at times, there seemed to be very few people posting quotes- at any level.
- Some traders capitalized on calendar spreads offers that did not adjust quickly enough to the change in market sentiment. ( I know ’cause I was the short). Calendar spread trades, by some measure, double-count volume as trades are executed simultaneously in two separate contracts. There was quite a bit of calendar spread trading in the first half of the year, and almost a boycott during the second half.
There are probably other factors, but these seem to be the key ones to me.
So….how do we reverse the trend from the second half of the year and set the stage for 500+ contracts in 2013? My sense is that three things are required:
- Market participants need to focus on spread orders to both express relative value views while also minimizing risks. While most of the spread orders in 2012 were for calendar trades, my hope is that inter-city trades will appeal to traders in 2013. Inter-city trades may be more challenging to follow, but I think that they provide a better platform for expressing views on relative value.
- New traders need to “own” a contract. That is, at various times there’s been a strong interest in particular regions. LAV, DEN, CHI and LAX have all had trading “champions” over the last two years that have either posted tight bid/ask markets and/or volume at key levels. Traders should feel free to pick a contract and make it their’s. I’m happy to use this blog to fill in gaps in pricing, or to promote any axes that I see (or that traders share).
- Network to bring in new players. I had a wonderful set of meetings at the recent AEA conference in (WARM) San Diego. There is a world of people interested in the concept of home price trading and hedging, and the more that they hear about the contracts, the more likely some are willing to cross over and actually trade. I’m willing to get on a plane (or Skype) and explain the contracts to a trader, a set of mortgage bankers, whole loan portfolio holders, or anyone else that might have an interest in learning more about the contracts.
Net, a part of me would be content with reading that 500 contracts traded in 2013, but I still believe that an exponentially larger amount is possible. Please feel free to contact me (email@example.com) if you have any ideas on how to make that dream a reality.