With a return of episodic spikes in volatility over the past 18 months, spurred by geopolitical shifts, the changing interest rate environment and major financial events such as the collapse of Silicon Valley Bank (SVB), the importance of effective risk management has become critical for institutional investors. As such, there has been an increasing need to respond to market-moving events around the clock, trading continuously and being able to access deep pools of global liquidity during non-U.S. hours (5:00 p.m. to 8:00 a.m. Central Time). This was evident during the recent early August volatility shock, when growth in non-U.S. hours trading volume in CME Group financial products reached new highs.
On August 1, a downturn in key U.S. economic sectors – manufacturing, construction, and employment – precipitated sharp declines in major stock indices and many financial assets, triggering a significant deleveraging event in Japan. The next day, weaker than expected July nonfarm payroll data (with only 114,000 jobs added) prompted a reevaluation of U.S. monetary policy. Treasury yields plummeted as expectations for interest rate cuts surged, with CME FedWatch indicating a high likelihood of significant rate reductions by year end.
As investors evaluated the impact on their portfolios over the weekend, the interconnectedness of the global financial system was starkly demonstrated early in Asian hours on August 5, with a sharp drop in Nikkei futures and the USD/JPY exchange rate falling, signaling a stronger yen against a weaker dollar. The ripple effect led to an uptick in trading in cash U.S. Treasuries and Equity Index options during Asian and European to transfer risk at the earliest-possible opportunity.
The chart below captures this surge in activity, with 12% of cash U.S. Treasuries average daily notional volume (ADNV) on BrokerTec transacted during Asian hours versus a year-to-date average of 4%. While equity futures and options contracts hit a single-day volume record of 5.1 million contracts traded during non-U.S. hours (on August 5).
As the trading day progressed and New York markets opened, trading volumes in futures, options and cash markets increased dramatically, highlighting the global and interconnected nature of market reactions to economic indicators and the pivotal role these instruments play.
Foreign Exchange market dynamics
The volatility in the foreign exchange (FX) markets prompted a significant increase in ADNV within the CME Group FX franchise. Nearly $250 billion ADNV was across a variety of FX instruments, including spot, non-deliverable forwards (NDFs), futures and options. Both EBS and FX Link recorded single-day volume highs of $145 billion (the highest since March 2020) and $13.5 billion, respectively, emphasizing the pivotal role of CME Group in providing liquidity and facilitating effective risk management in the FX markets.
Interest Rate futures and BrokerTec volumes
There was also a notable increase in activity in interest rate futures, with substantial volumes in Treasury, SOFR and 30-Day Federal Funds futures. Treasuries futures hit a new open interest (OI) record of 22 million contracts. This activity was a clear indication of the market’s need to hedge against interest rate volatility, which was effectively captured by the CME Group CVOL index showing a sharp rise.
BrokerTec, the platform for trading on-the-run Treasuries, played a crucial role during this period by providing continuous deep liquidity pools. On Monday, August 5, BrokerTec set a 2024 trading record of $249 billion ADNV, underscoring its significance in the Treasury market.
Equity futures and options activity
As volatility rose, options on equity index futures, including those on the S&P 500, Nasdaq-100, and Russell 2000, saw over 725,000 contracts traded – nearly three times the year’s average daily volume (ADV). This impressive volume highlights the global liquidity available through CME Group, enabling investors to effectively manage equity market risks.
The equity markets also saw a flurry of activity. Micro E-mini Nasdaq-100 futures achieved a record single volume day of 3.4 million contracts on August 5. The below chart reflects volume traded w/c August 5.
Cryptocurrency futures and options volumes
As market volatility increased, CME Group Cryptocurrency futures and options suite set records, reaffirming its role as a deep pool of liquidity for risk transfer.
The hourly distribution of Cryptocurrency futures volumes illustrates how investors managed risk exposure continuously throughout the day and night.
Conclusion
The significant economic shifts and market reactions in early August have underscored the essential role of financial instruments in risk management. CME Group platforms and products were indispensable in providing the necessary tools for investors to navigate these uncertainties around the clock.
The ability to quickly adapt and utilize comprehensive financial products will continue to be crucial. CME Group’s proven ability to support massive volumes and provide deep liquidity is an essential asset to the global financial community, ensuring readiness for future market challenges.
All examples in this report are hypothetical interpretations of situations and are used for explanation purposes only. The views in this report reflect solely those of the author and not necessarily those of CME Group or its affiliated institutions. This report and the information herein should not be considered investment advice or the results of actual market experience.
