By John J. Lothian
I feel old. It seems like just yesterday I was visiting the CME trading floor over on Wacker Drive, meeting a friend from Wisconsin who was a new trader in the S&P 500 pit. Now the Spoos are turning 30 years old tomorrow. Look for news about this on the CME Group’s Facebook page among other places.
Later this year, the E-mini S&Ps will celebrate their 15th anniversary, which means that I have been directly involved with electronic trading for 15 years. It was the E-mini S&P that brought me back to trading stock index futures.
As a broker, my retail clients and I could not take the risk of trading S&Ps any more in the late 1990s. At $500 a point, with huge volatility, it was sometimes possible to lose money in the S&Ps faster than you could burn the physical cash with help from a blow torch. The CME’s changing of the multiple of the S&P from $500 to $250 was a great first step. Introducing the $50x-the-electronically-traded-index emini was the next. That change in contract terms may be the greatest futures contract specifications modification of all time.
Of course, part of the reason for the change was not just the unmanageable $500 multiplier, but also that the CBOT was going to introduce a Dow Jones Industry Index futures contract with a $10 multiplier. It was some time before the CBOT finally came up with an electronic $5 version and saw volumes take off.
Let us not forget one of the reasons that the S&P 500 was such a successful contract: the litigiousness of the CBOT leaders and members. The CBOT, the largest exchange in the world in the early 1980s, wanted to trade futures on the Dow Jones Industrial Average and got into a big legal fight with Dow Jones about whether they could just do that. The fight went on for years. Meanwhile, CME and KCBOT introduced the S&P 500 and Value Line futures and had first mover advantage. I used to have customers that loved to trade the S&P 500 vs. Value Line spread.
The CBOT finally introduced the Major Market Index, a Dow Jones Industrial Average lookalike, but without the marquee brand name. The first version of the MMI contract had the opposite problem of their later Dow Jones product: they introduced a contract size that was too small, with a multiplier of $100. Later, they introduced the Blue Chip version of this contract with a $250 multiplier and had some success. It was the trading in the Blue Chip pit during the 1987 stock market crash that turned the market around when the NYSE and CME were temporarily closed.
But the S&P 500 proved to be the broad market index with the most utility for all kinds of equity players and futures market speculators. So as we celebrate the 30th anniversary of the S&P 500 futures, we must remember the litigiousness, stubbornness and lack of foresight of the CBOT leaders of the 1980s about stock index futures; the competition from the CBOT later to correct the mistake they made; and the innovative response of the CME to the unmanageable contract size and competition from the CBOT.
One of the most important lessons about the S&P 500 index futures was how it related to risk. What we learned as an industry from the S&P 500 was that if you gave customers and potential customers tools to more directly manage their specific risks, the more risk they could take. It was not long after the S&P 500 index futures were introduced that stock prices started moving higher amid the recession in the early 1980s. Fund managers were able to lay off risk of their portfolio, or take on more risk in a single trade that gave them exposure to the 500 stocks in the index. With this new tool, they started to take more risk and began to buy the market. The great rally of the 1980s started shortly after the introduction of the S&P 500 futures.
That was a very valuable lesson for the futures industry to learn and it led to a flurry of innovation in the 1980s and 1990s.
Happy Anniversary Spoos.