The evolution of a benchmark contract?

The Nov ’16 CUS contract seems to have evolved into the “go-to” market for those looking to express a view on longer-term home price moves.  Much of the trading beyond 2014 expirations (across all regions) has taken place in this contract, and the bid/ask spread has been grinding in to less than one point.  I’d like to encourage this evolution as it addresses one of my concerns about trading in the CME Case Shiller (home price index) futures -that is that multiple regions, combined with multiple expirations leads to fragmentation of limited interest.  Greater focus on a single benchmark contract will also make for a deeper market (more size on each of the bid and offer side) thus also addressing concerns from those looking to trade more than one contract at market prices.  Focus on a single contract might also allow traders that spread their exposure across a wide range of contracts (and thus have risk) to reduce their risk to movement of a single contract.  (Focus on this market during the opening and closing hour may be another way to encourage  more visitors.)

A robust CUSX16 contract will also facilitate potential intercity spread trades.  (Again, help in figuring out how to post such orders on Interactive Brokers would be VERY appreciated).  That could lead to a series of debates about whether NYM, LAX or other regions will out-/under-perform CUS over the next two years (and by how much).

The CUSx16 contract also can serve as the anchor for calendar spreads (both forward to 2015 and to longer exposures).  In time (possibly as Nov ’14 expires?!?) the Nov ’16 benchmark can be rolled forward to Nov ’17.

This is not intended to deflect interest from trading in front contracts (which have tended to dominate volume) or interest in other regions, but IMHO, markets are more likely to thrive when there’s a single benchmark contract that’s tightly quoted, cited often in the press, and well traded.  I’m not suggesting that the CUS contract is the best hedge for anything, but it could be the “tool” that traders implicitly agree to use to express general views on home prices, and that research staffs cite for implied HPA and market expectations.  With better spreads (and hopefully more size on each side) traders might feel more comfortable trading throughout the month (instead of the current pattern of trading around CS release dates) and might be more interested in trading in reaction to other news (e.g. unemployment, +/- 100 point days on the Dow, release of CoreLogic and other vendors updates).  Greater intra-month trading (even if only in a single contract) might bring traders back to the market throughout the month that might otherwise only currently tune in around CS release dates.

So, if you want to encourage liquidity in the overall CME contracts please consider keeping one eye on the CUSX16 contract (while you continue to pursue other markets).  I’ll try to tweet trades, but others can help using #CaseShiller on Twitter.

Feel free to contact me (johnhdolan@homepricefutures.com) if you have thoughts on this approach, or care to discuss any aspect of hedging home prices.