Basics: The Ultimate FAQ: Why isn’t there more volume in the CME Case Shiller Home Price Index contracts?

Having addressed the technical FAQs in a recent blog, I’d like to address the most important FAQ: Why haven’t there been more volume in the CME Case Shiller futures?

In discussions with various interested parties over the past three years I’ve received lots of push-back as to reasons they won’t trade, but also enough enthusiasm and curiosity to remain optimistic that someday these contracts will be traded more frequently. However, certain issues and perceptions need to be faced and addressed.  Here are 10+ concerns that I can recount.  I’d love feedback on:

  • Which of these issues readers find to be the biggest challenge,
  • Whether other critical impediments exist, and
  • Ideas on how best to address each issue/perception.

I started aggregating ideas, counter-arguments and business plans to address each perception (so a few months’ worth of blogs, a consulting project, and/or eventually an academic paper), but then decided, rather than presume what I think is “wrong”, to first hear your concerns.

Net I still believe that the day after one 250-lot buyer and seller find each other, and are able to cross exposures on the CME Case Shiller futures, that many of these perceptions/issues will abate.   In the meantime, I’d appreciate any help in creating an environment where that day can occur as soon as possible.

So, even more so than on most blogs, please feel free to get back to me (johnhdolan@homepricefutures.com) to start a discussion on any one of these topics.  My sense is that many of these issues/perceptions are “solvable” either with one big trade, or a more focused marketing strategy.

10(+) reasons the CME Case Shiller (home price index) Futures haven’t gotten off the ground.

  1. Lack of Awareness
  2. Absence of Natural Longs/Shorts
  3. Lack of Volume/Open Interest/Perceived Limited Depth of Market (“Chicken & Egg”)
  4. Index specific Issues
    • Rigor of repeat sales index vs. limited data points
    • Basis Risk versus hedging benefits (for individuals)
    • Geography – both “too broad” (within region) as well as “not enough regions”
    • Lagged calculation and disclosure
    • Moving Average –slow moving and subject to revision
  5. Preference by investors for active management vs. a portfolio of “average” prices.
  6. Lack of financial incentives to hedge (e.g. better Capital Charges, higher advance rate for RMBS)
  7. Absence of a cash market/index to hedge (leads to wider bid/ask spreads)
  8. Lack of “Action”
  9. Trading hours fragment potential interest (open 21 hours/day), burden market maker
  10. No (current) need to hedge in bull market, or across highly correlated regions
  11. Perception that Wall Street gives more support to OTC products
  12. Fragmented ownership of futures trading (exchange, index provider, market maker)
  13. Derivatives on Home Price indices (e.g. options and /or ETFs) might be better suited to client needs