Opening Print: THE VIX AND THE DEMISE OF THE FUTURES MARKETS

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The VIX

Traders love action. Whether it's crude oil at $100.00s, gold at $850 or the S&P futures trading 1500, it doesn't matter what market you like to trade, you need orders to trade off of.

While the S&P continues its ascent to new contract highs, there is a big problem brewing. It's called the VIX. Its low price is actually hindering traders from making bets. Order flow in all the futures and option pits is at a standstill and it seems to be getting worse as we go into the final week of January. Recent history has taught us that when the VIX gets this low, risk goes up, but that may not be the case this time around, and currently the price action suggests there may be further to go on the downside.

Adam Warner of Schaeffer's Investment Research said the VIX is "not as silly low as meets the eye" once the SPX's lack of volatility is taken into account. Yesterday the VIX closed at 12.46, one of the lowest readings since 2007.

There is no doubt about the effect of the lower price of the VIX on traders in the CME's S&P and S&P options pits. The ranges are getting smaller and the level of customers pricing options has dropped dramatically. One property trader from one of the larger firms said that it's not like they don't want to trade, it's just the selection and the low number of customers trading has made it extremely difficult. "You sit in the pit all day and walk out for five minutes and a big trade goes up, it's very frustrating."

There have been a lot of slow periods over the years for all sorts of reasons, but after five years of the credit crisis and the demise of MF Global and PFG, one has to question how many players are actually left. Some say there were over 2 million retail customers prior to 2007 and that today that number is down to one-third. With all the different trading desks and trading firms that have shut down over the last few years, it's hard to figure out what exactly is behind the slowdown and how much longer it will last. Most of the traders we talk to on the floor worry that the only way to break out of this pattern is something bad to happen. On January 2 the VIX made a high of 21.50 and closed at 12.46 on Wednesday, an almost 10-point drop. Back in December 2006 the VIX got down to 9.39, and that may be where it's heading now.

Danny Riley is a 34-year veteran of the trading floor. He has helped run one of the largest S&P desks on the floor of the CME Group since 1985.

Our view: The S&P futures have closed higher 6 days in a row and have been up 11 out of the first 15 trading days of the year. The higher the S&P goes, the slower it gets. And get this: Of the 4 lower closes, the most the S&P has closed down all year is -3.5 handles. Our view is this is not over. Like we have been saying, the patterns are to buy the morning selloff and then be a buyer and hold into the afternoon.

  • It's 7 a.m. and the ESH is trading 1487.50, down 2.75 handles; crude is up 39 cents at 95.62; and the euro is up 13 pips at 1.3338.
  • In Asia, 6 out of 11 markets closed higher (Shanghai Comp. -0.79%, Hang Seng -0.15%).
  • In Europe, 7 out of 12 markets are trading slightly lower (CAC +0.07%, DAX -0.04%).
  • Today's headline: "S&P Futures Seen Lower After 6 Higher Closes"
  • Total volume: 1.19mil ESH and 8k SPH traded
  • Fair value: S&P -2.51, NASDAQ -33.47
  • Economic calendar: Today: Jobless claims, PMI manufacturing index, leading indicators, API & nat gas, Kansas City Mfg. Index, 2yr, 5 yr, 7 yr. auction, Fed balance sheet and Monday supply.

Mr Top Step Closing Print Video: https://mr-topstep.com/index.php/multimedia/video/latest/mrtopstep-closing-print-video-1-23-2013

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