We first started covering the CME Housing Futures and Options products in April. The first day of trading was May 23rd. By May 30th we started worrying about the resounding lack of interest, and thus non-existent liquidity. The question now: Is there a future for Housing Futures?
Futures and options markets are driven by volatility. Uncertainty in the market breeds volatility. The residential real-estate market today is certainly as uncertain as any stock or bond market--perhaps even more so. So, when talking about the CME's CSI Housing futures and options, where are the market participants? Certainly there should be a ton of hedging demand from the likes of big home builders, lenders and other holders of MBS instruments. Similarly, we should expect a rush of industry professionals willing to speculate against hedge trades. Or should we?
The options are only pit-traded, so it's a bit difficult to determine the volumes being traded as much of the data has yet to hit the CME's volume data. For June '06, all I could find without calling a trader was:
JNE 2006 MONTH AGO YEAR AGO JAN-JNE 2006 JAN-JNE 2005 % CHGE % CHGE % CHGE
CIS HOUSING INDEX OPT * 347 20 --- 367 --- + UNCH - -- - --
CIS HOUSING INDEX CALLS --- --- --- --- --- + -- - -- - --
CIS HOUSING INDEX PUTS * 347 20 --- 367 --- + UNCH - -- - --
These numbers are hardly a resounding endorsement of the option market. As for the futures market, there is so little activity that there is no market price for any of the contracts available to trade.
MTH/ --- SESSION --- PT EST ---- PRIOR DAY ----
STRIKE OPEN HIGH LOW LAST SETT CHGE VOL SETT VOL INT
AUG06 ---- ---- ---- ---- ---- UNCH 225.40
NOV06 ---- ---- ---- ---- ---- UNCH 223.80
FEB07 ---- ---- ---- ---- ---- UNCH 218.20
MAY07 ---- ---- ---- ---- ---- UNCH 215.00
TOTAL EST. VOL VOL OPEN INT.
TOTAL
That's the CME Composite CSI Housing Futures Index. All the other contracts (Boston, Chicago, Denver, Las Vegas, Los Angeles, Miami, New York, San Diego, San Francisco, Washington DC) look pretty much the same.
Too Early to Call?
Of course, seasoned professionals will remind that development of most new financial products can take quite a bit of time. Investors need to digest the market, figure out the implied risks, and determine whether the new product is useful or superior to other products and techniques. Once upon a time folks were questioning whether ETFs would survive beyond a quick fad. Now you can hold a Vanguard ETF inside of your tax deferred retirement account. So, there's no telling for sure whether CME housing futures and options will eventually achieve critical mass.
In fact, scanning through the live quotes I found some fleeting signs of life.
A good question came in from the parallel discussion I'm running at www.patrick.net
There is no way to arb between the underlying and the futures. Perhaps this is why the liquidity is not there. Isn’t this similar to weather futures?
(My response)
You could arb the positions, but it would be difficult and very illiquid on the underlying side. For weather futures you could buy & sell concerns directly related to the weather region. Same with housing, but a bit more difficult.
You could create a hedge-hedge. For example, using options (or LEAPs) on Home Depot you could play the correlation of HD to the composite housing index. But this would a big statistical quant play, probably best left to quant hedge funds with the computing and brainpower to have a chance at pulling it off.
But with no liquidity to begin with, it's all a moot point. The operational hedgers need to come first before there's room for arbitrageurs and speculators.
Posted by: randolfe | Tuesday, July 11, 2006 at 10:55
I see that there are multiple-contract bid-ask prices in Las Vegas. Perhaps the contract will be more successful inside the casino. :)
Posted by: Peter P | Tuesday, July 11, 2006 at 12:52