Trading Behaviour in Closely Related Markets for S&P 500 Index Futures

Abstract

This article examines the determinants of trading decisions, and the performance of trader types, in the context of the E-Mini S&P 500 futures and S&P 500 futures markets. Although the markets are very similar, essentially trading the same underlying asset but with different contract sizes, some significant differences in trading behaviour in each market emerge. Speculators and small traders tend to follow positive feedback strategies while hedgers adopt contrarian strategies. Small traders apparently act as liquidity providers in order to meet hedging demand. Generally, traders are better at predicting market rallies, and while speculators are most adept at adjusting their position ahead of large changes in futures prices, small traders make correct return predictions most frequently. There is evidence of behaviour changing in the aftermath of the 2008-2009 financial crisis; subsequently hedgers have helped to stabilize prices in the futures market.

Keywords: Investor behaviour, index futures, S&P 500

JEL Classification: G1, G13, G14