S&P 500 Futures: A Global Benchmark Turns 35

At a Glance

  • Launched in 1982, "spoos" was the first successful equity futures contract
  • Contract evolved to become the most liquid futures contract in the world

“This market smells like a winner.” So pronounced the legendary CME gold trader Maury Kravitz when he became the first trader to execute an exotic new contract nicknamed “the spoos” some 35 years ago.

Kravitz, who passed away in 2012, proved to be incredibly prophetic about the product, the S&P 500 Futures — which had more than its share of birth pangs when it began trading on the Chicago Mercantile Exchange in April 1982.

Nevertheless, S&P Futures evolved to become the most liquid futures contract in the world, as well as a yardstick for investors needing insight into the direction of global equities, and the broader economy.

“I think when you put all these things together, the capital efficiency, the central clearing, the liquidity, 24 hour access – that’s what really makes the futures on the S&P 500 so powerful in terms of its risk management capabilities,” says Tim McCourt, CME Group’s Global Head of Equities.

 

“This is a real market”

But back in the early 1980s, the success of the contract was hardly a foregone conclusion. It was not even certain whether the revolutionary idea would win approval from regulators in Washington.

1982 was the year Sony introduced the CD player, and the Commodore 64 made its debut as an incredibly successful home computer. Ronald Reagan was in the White House and Paul Volcker held sway over the Fed.

“S&P Futures are Traded,” was the headline in the New York Times on April 21, 1982, when CME’s contract splashed onto the world stage. The workmanlike headline hardly captured the drama it took to bring the innovative investment tool to investors, nor did it give an inkling of what it would become – a world benchmark.

But traders at the Chicago Mercantile Exchange could sense they were on to something big. At that time, CME was made up of trading pits for everything from meats to currencies. But now they were vying to enter the world of stocks.

As reported by the Times, Kravitz, the gold trader, said he bought the contract for a client with a big stock portfolio. The seller was another floor trader, George Segal, who normally occupied himself with pork bellies.

At the end of the day, Kravitz, also a Genghis Khan buff, estimated he traded some 200 contracts on that historic day. He was clearly enthusiastic: ”I’m basically a gold futures trader but this market smells like a winner. I’m really impressed by the origin of the business we’ve seen today. This is a real market; we are not creating open interest by, as the saying here goes, exchanging each other’s laundry.”

 

Biggest innovation since currencies

One of the hallmarks of the contract was the idea it could all be settled with cash, which eliminated the logistical challenge of trying to deliver stock certificates in the contract.

“Cash settlement was the biggest innovation since the introduction of currencies in 1972 because it opened the way for the cash-settled stock indices, the futures product that would dominate the 1980s,” author Bob Tamarkin wrote in his book “The Merc.”

The idea that the big futures exchanges of the day would break into equity indexes had been around for a while, and it came almost exactly 25 years after the launch of the S&P, which expanded to 500 stocks in 1957. However, it was an issue that vexed market regulators, raising the ire of the Securities and Exchange Commission, in particular.

“They saw futures traders as wily farm boys and cowboys who were moving in through the back door of the stock market, where they believed they had God-intended jurisdiction,” wrote Emily Lambert, in her book, “The Futures: The Rise of the Speculator and the Origins of the World’s Biggest Markets.”

The regulators, CFTC and the SEC, eventually hashed out an accord to allow futures exchanges to invade the holy grail of stocks, including accepting the idea that futures sellers could be settled with cash rather than delivering stocks.

CME’s application won approval on April 20, 1982, and trading began the next day. “The Merc had an army of traders willing to quote bids and offers,” Lambert wrote.

 

Building a liquidity ecosystem

Today, the S&P futures universe has evolved to include a suite of instruments.

“Over that time, passive investment has evolved from a fringe concept to perhaps the most significant force in today’s investment management industry,” says Jamie Farmer, Managing Director of Index Data Services at S&P Dow Jones Indices. “That broad adoption has occurred concurrent to the development of a liquidity ecosystem second to none.”

One of its biggest innovations was the introduction of the E-mini S&P in 1997, as a way of attracting smaller players.

And the plan worked. Some 2.9 million of the big S&P contracts traded in its maiden year in 1982, and in the next year volume more than doubled to more than 8 million. But that contract peaked at 31.4 million in 1998 after the introduction of the E-mini.

The E- mini saw 885,819 contracts traded in its first year, it quadrupled in the second year to 4.5 million, and never looked back after that. In 2016, some 472.7 million contracts traded hands.

Morad Askar, a professional trader in Chicago and known online as FuturesTrader71, is a fan of S&P E-mini because of its orderly nature, and overall transparency.

“The reason I trade them and the reason they are so popular is because they have the liquidity, they have enough eyes on them, they have enough participants in them, that the auction that goes on, the gyration of price can be fairly well predicted,” Askar said in an interview with OpenMarkets.

He said the product is straight forward, and the information and news on stocks are easily available to most people.

“It’s easy to understand, not as complicated as a treasury, or the eurodollar. It’s simple. Everybody understands stocks.”

McCourt, of CME Group, believes the growth in the S&P contract has the potential to continue as the exchange strives to innovate to “alleviate the pain points” for investors worldwide.

“Market participants can always use a product that solves a problem and increases efficiency.”

Russell Blinch has extensive experience writing about commodities, energy and the environment. His work has appeared in numerous outlets such as the Guardian, DeSmogBlog, Huffington Post, Reuters and at his own site, copycarbon.com. Russell was previously a senior editor with Thomson Reuters where he wore many hats—correspondent, bureau chief, and specialist editor – while being stationed in Ottawa, San Francisco, Singapore, Washington, DC, and Toronto.

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