EFTs, e-minis defy low equity derivatives flows

Exchange-traded funds (ETFs) and e-mini contracts defied January's trend of unusually low derivatives volumes and volatility, according to Joanne Hill, managing director and head of trading research at Goldman Sachs.

Speaking about the equity markets as a whole, which hit a day-to-day volatility low of 17%, compared with 25% in January 2001, Hill said: “These are not the size of flows we normally see. Portfolio managers have been acting more cautiously this year following the Enron scandal. Also business conditions in industry are not that great.”

But despite the low volatility levels there was a pick-up in ETF activity in January, with volumes rising by 16% after a decline last September. The most popular ETFs were the Chicago Board Options Exchange's Nasdaq-100 index tracking stock and the S&P depositary receipts traded on the American Stock Exchange. These two contracts accounted for 80% of the total average daily volume in January, according to Goldman.

The main reason for the boost in ETFs has been an increase in long/short hedge fund activity, as hedge fund managers have increasingly been using ETFs to short the market, said Hill.

Another significant development this year has been the growth in e-mini contracts, the Chicago Mercantile Exchange's electronically traded futures contracts that are one-fifth the size of standard index futures. E-minis on the S&P 500 almost doubled in volume in January. The increase in e-mini volumes comes as more dealers are incorporating the contracts into their systems. “The main thing is not the size but the convenience with which they can be traded,” said Hill.