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Futures Trade Desk- New Generation Trading Environments


Trade Desk Client Note

Global Futures Market Review

New Generation Trading Environments

Cash is King for those who are unable to quickly react to the ever-changing intra-day mood swings in risk tolerance. This is getting ugly as Equities, currencies, oil, bullion, and Treasury yields are all being affected by mid-session cash market ramps up and down that fail to follow through in the proceeding session. Its back to the January opening prices for S&P 500 as the stair-step up/elevator down moves continue.

As boring as it seems, regurgitated headline news and volatile reactions continue to dominate the daily process of finding fair value. No new signals are forming either long or short on global asset class trade. The EU Summit and global interest rate decisions will be key. Last weeks surreal economic releases printed 3 standard deviations higher than expected, which will now be subject to revisions next month.  

For traders not connected to the 24-hour global market the waiting for regional cash markets to open can be somewhat frustrating. It is becoming abundantly clear that a as much price action hits in the futures market than in the regional cash market, and those traditional investors who are standing on the outside looking in while futures trade adjusts to daily swings in fair value may be constantly missing the bulk of movement in any given day.

The new normal, post-Too Big to Fail bailout environment has created a trading arena with a low attention span, and an algorithm driven pattern of trade that views one day as the equivalent of what was one month of trade just a decade ago. The consequence has been the evolution of a new breed of global market trader that has an understanding and comfort zone in trading a range of asset classes and is willing to change tack at short notice in reaction to changing global market dynamics. 

The most common thread of the new-generation trader is their focus on international markets, and how market correlations can be traded ahead of the 9-to-5 cash market open via futures contracts. They are able to use 24-hour market access leverage and cross-border trading patterns in different asset classes to complete their work before regular traders even start to read the news headlines. 

When the talking heads state that “Futures are in the green today…” the savvy trader has already found a way to access the momentum. In the current economic environment there is a need to create more time away from the charts, and futures contract access allows that to happen for those who have realized that the halcyon days of trending buy-and-hold patterns have been replaced with buy-and-sell near-term trading. 

One and four-hour charts are being used more often in setting trend and momentum reads in place of daily and weekly reviews which cannot keep track of new-generation momentum flows. The near-term views allow the new-generation of global trader and investor the chance to be in positions before each regional cash market opens. The facts are that as much price action happens in the futures market trade as it does in the live cash session for each region, which is a pattern that will only get stronger.

Unfortunately for most, taking the leap of faith and moving towards a new system of trade will be too daunting a task, but just as options and ETF trade emerged and developed, so futures contract trading will draw traders and investors into a new world of 24-hour market access. 

New-generation traders will cast their eye on overseas equities to see how the dollar is reacting, or look to London Libor rates impacting Chicago futures markets, or to NYMEX oil trade impacting the order flows in commodity-based currencies. In the global world it is far easier now to leverage time than ever before, and the new breed of global market trader has access to 24-hour support organizations such as ours that are doing the heavy lifting and research.

The world of futures trading is already a reality and is happening without the time restraints that made up Grandpa’s 9-to-5 market. For many traders and investors the reality of making use of leveraged time will be a compelling reason to garner more information on global market trading. For those unwilling to take on the learning curve of futures trading or for those who just cannot make the time to access the 24-hour global market, the world of Managed Futures is starting to get main stream media attention.

Futures, Forex, and Commodity trade offers access to the largest global markets which generate over $4 trillion in combined daily volume (source: BIS settlement data). Futures markets allow for the global exchange of goods and services in different currencies 24-hours a day, allow producers to hedge forward contract commitments, and allow speculators to offer liquidity as part of the cycle of global commerce. This daily process creates a global market-place with high momentum where Managed Futures can track the ebbs and flows of international trade and risk tolerance across each regional time-zone.

The exponential growth in Managed Futures over recent years has been matched by the decline in Managed Equity funds (source: ICI annual Equity Fund reporting). There have been record equity redemption's at a time that Managed Futures have seen increased inflows. Managed Futures have been used successfully by investment management professionals for more than 30 years. 

Institutional investors looking to maximize portfolio exposure continue to increase their use of Managed Futures as an integral component of a well diversified portfolio. With the ability to go long or short, Managed Futures are highly flexible financial instruments with the potential to profit from rising and falling markets. Managed Futures have virtually no correlation to traditional asset classes, enabling them to enhance returns as well as lower overall volatility. 

Managed Futures diversify beyond the traditional asset classes as an alternative that has achieved strong performance in up and down markets alike. They invest across a broad spectrum of asset classes with the goal of achieving solid returns and reducing volatility via a near-term outlook. When used in conjunction with traditional asset classes Managed Futures may reduce risk while at the same time potentially increasing returns in bull and bear markets, boasting decent long-term track records despite economic downturns.