Why Dow Index Futures Are as Important as Ever

At a Glance

  • The Dow Index celebrates 120 years

Exactly 120 years since its debut in 1896, the Dow Jones Industrial Average – or, the Dow – blazed a trail for the entire industry of security market indexing. The idea that the dynamics of the securities market can be summarized by a single mathematical quantity have withstood the test of time; in the same span of time, countless natural, political and economic events have transpired, and the complexity of the financial market has grown tremendously. Yet, the Dow jones Industrial Average remains as strong as ever. Worldwide, “the Dow” is virtually synonymous with the American stock market, and a company’s inclusion in the Dow index remains a status symbol – an indication that the company is a stalwart of the American economy.

Countless financial instruments indexed to the Dow are traded in the global financial market.  The Dow futures market launched 19 years ago at CME Group, and nine years later, fully electronically-traded E-mini Dow Index futures launched. The liquidity pool for the instrument is unparalleled; in 2016, turnover in the futures contract reached $16.1 billion per day, equivalent to approximately 220 percent of the turnover of the constituent stocks at their primary listing exchanges. With just one click of a mouse, market participants can access this highly-liquid benchmark via the index futures.

Indeed, the E-mini Dow Index futures prove to be a vital cog in the financial market.  Investment bankers can sell investors structured products linked to the index by hedging with the futures and options contracts on the index.  Market makers and proprietary trading firms make markets in the futures by arbitraging it with the underlying securities market.  Market participants can also use the futures market to fine-tune their exposure, adding and subtracting their positions linked to the index with ease.  The exchange-for-physical mechanism as well as the newly launched Basis Trade at Index Close market for the E-mini Dow Index futures provide additional conduits to bring financial capital to bear.

After 120 years, the Dow is as vibrant as ever. E-mini futures are one important reflection of this. But regardless of the direction of the development in the financial markets going forward, CME Group and Dow Jones Industrial Average will continue to evolve and reflect the changing reality in the American economy and its financial markets.

 

Richard Co is executive director of equity products at CME Group.

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