Trading behavior in 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. Speculators and small traders tend to follow positive feedback strategies while hedgers dynamically adjust positions in response to market returns. Such strategies apparently reverse during the 2008–09 financial crisis. Investor sentiment and market volatility play an important role in determining the net trading position of traders across the sample period. While all trader types are better at foreseeing market upturns, an out‐of‐sample test suggests that speculators and small traders have some predictive ability for short‐term market returns.

Feedback trading: a review of theory and empirical evidence

“…, 2007; Kurov, 2008; Salm and Schuppli, 2010; Antoniou et al. , 2011; Lai and Wang, 2014, 2015; Smales, 2016; Chen and Yang, 2021) confirming empirically the significance of (predominantly, positive) feedback trading in that segment [83]. At the macro level, positive feedback traders often appear more active in index futures during market slumps (likely due to index futures being utilized for portfolio insurance – Salm and Schuppli, 2010; Antoniou et al.…”

“…The bulk of research on feedback trading in derivatives' markets pertains to index futures contracts [82], with a large number of studies (Wang, 2002(Wang, , 2003Ghysels and Seon, 2005;Cheng et al, 2007;Kurov, 2008;Salm and Schuppli, 2010;Antoniou et al, 2011;Wang, 2014, 2015;Smales, 2016;Chen and Yang, 2021) confirming empirically the significance of (predominantly, positive) feedback trading in that segment [83]. At the macro level, positive feedback traders often appear more active in index futures during market slumps (likely due to index futures being utilized for portfolio insurance -Salm and Schuppli, 2010; Antoniou et al, 2011) [84] and extrapolate from horizons of several days ("long memory"; Antoniou et al, 2011).…”

“…At the micro level, research offers evidence on feedback trading from three markets (US; South Korea; Taiwan) and allows us to gauge the variations in feedback trading across different trader-types. Studies on US futures' markets indicate that hedgers (speculators) engaged in positive (negative) feedback trading during the 1990s (Wang, 2002, 2003); however, Smales (2016) demonstrated that hedgers (speculators) negative (positive) feedback traded during the 1997–2012 period, yet switched feedback trading signs within the global financial crisis [85]. In addition, US index futures traders have been found to project feedback trading when sentiment (extracted via sentiment surveys) is high (Kurov, 2008) and uncertainty (proxied by the CBOE VIX index) is low (Chen and Yang, 2021) [86].…”

“…85. Wang (2002, 2003) and Smales (2016) utilized traders' positions; Wang (2003) relied on monthly data, while the other two studies on weekly data. With the exception of Wang (2003) who used futures' contracts from various asset classes (financial; agricultural; commodities; currencies), the rest two studies focused on index futures.…”

The Relationship between Crude Oil Futures Market and Chinese/US Stock Index Futures Market Based on Breakpoint Test

“…Hamid and Iqbal [ 12 ] used the neural network to improve the accuracy of prediction of the volatility of S&P 500 stock index futures. By studying the trading behavior of S&P 500 stock index futures, Smales [ 13 ] found that after the 2008 financial crisis, investors abandoned the previously widely adopted positive feedback trading method and switched to the investment strategy with market volatility and investor sentiment as the main reference standard. China, which has the world’s second largest economy, has been developing stock index futures for a relatively short time, but it is still widely followed by financial market participants.…”