Market Extra: Fed decision may bring new life to fed-funds options pit
Futures-trading pits in Chicago and New York have been under siege, with today’s market participants favoring computers over flesh-and-blood traders.
In some markets, the pits have closed altogether, while a lack of demand for open-outcry execution has left others all but defunct.
But the Federal Reserve may breathe fresh life into at least one Chicago pit.
As bets pour in over when the central bank will announce its first interest-rate hike since 2006, and the first big change since the Fed cut rates to nearly zero in 2008, trading of fed-funds options in the open-outcry pit is set to climb.
“Fed-funds options have been moribund for quite awhile,” observed Bear Brokerage’s James Criner.
But heightened expectations that the Fed may lift rates—if not at the central bank’s policy meeting starting Sept. 16 then before the end of the year—for the first time in nearly a decade has created some buzz in the fed-funds pit.
When trading slowed, many fed-funds options traders moved off the floor completely or moved to eurodollar options, said Phil Flynn, senior market analyst at Price Futures Group in Chicago. The market had “basically been dead” because everyone knew, since the central bank started quantitative easing in 2009, that rates weren’t going up any time soon, he said.
In 2009, CBOT fed-funds options saw daily volume of around 29,557 contracts, with total volume at about 7.48 million, compared with daily volume of just 101 contracts and total volume of 25,533 last year, according to the CME Group.
Already federal-funds options activity is on the rise again. So far this year, daily volume is at 1,340 contracts, with total volume at 230,394. About 90% of fed-funds options trading is executed via open outcry—a system of trading involving traders communicating via shouts and hand signals.
The table below illustrates how trading volume in fed-funds options has changed over the past few years.
“Most of the speculation on the course of Fed policy is typically expressed in eurodollar futures EDV15, +0.00% and options,” in part because of the low market liquidity in Fed-fund options, explained Criner.
Fed-fund futures FFV5, -0.01% traders and eurodollar options traders were “praying for an interest-rate increase” and will definitely see more activity going forward, said Flynn.