Market Volatility Shines a Light on Overnight Risk Management
2 Min readArticle04 Oct 2024
Market Volatility Shines a Light on Overnight Risk Management
By Eric LeiningerAt a Glance
The interconnectedness of the global financial system means that events in one region can have immediate ripple effects globally
Amid volatility in early August, trading volume in CME Group futures and options rose to record highs across various asset classes
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 early August volatility shock, when growth in non-U.S. hours trading volume in CME Group financial products reached new highs.
A Global Reaction
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 hours to transfer risk at the earliest-possible opportunity – 12% of cash U.S. Treasuries average daily notional volume (ADNV) on BrokerTec was transacted during Asian hours on August 5, versus a year-to-date average of 4%. Equity futures and options contracts also hit a single-day volume record of 5.1 million contracts traded during non-U.S. hours.
Trading Volumes Soar
As the trading day progressed and New York markets opened, trading volumes in futures, options and cash markets increased dramatically, highlighting the pivotal role these instruments play:
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Foreign Exchange: 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.
Interest Rates: 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.
Equities: 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). Micro E-mini Nasdaq-100 futures achieved a record single volume day of 3.4 million contracts on August 5.
Crypto: As market volatility increased, CME Group Cryptocurrency futures and options suite set records. The hourly distribution of Cryptocurrency futures volumes illustrates how investors managed risk exposure continuously throughout the day and night.
Financial Tools Prove Vital
The significant economic shifts and market reactions in early August have underscored the essential role of financial instruments in risk management, with CME Group platforms and products 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.
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About the author
OpenMarkets is an online magazine and blog focused on global markets and economic trends. It combines feature articles, news briefs and videos with contributions from leaders in business, finance and economics in an interactive forum designed to foster conversation around the issues and ideas shaping our industry.
All examples are hypothetical interpretations of situations and are used for explanation purposes only. The views expressed in OpenMarkets articles reflect solely those of their respective authors and not necessarily those of CME Group or its affiliated institutions. OpenMarkets and the information herein should not be considered investment advice or the results of actual market experience. Neither futures trading nor swaps trading are suitable for all investors, and each involves the risk of loss. Swaps trading should only be undertaken by investors who are Eligible Contract Participants (ECPs) within the meaning of Section 1a(18) of the Commodity Exchange Act. Futures and swaps each are leveraged investments and, because only a percentage of a contract’s value is required to trade, it is possible to lose more than the amount of money deposited for either a futures or swaps position. Therefore, traders should only use funds that they can afford to lose without affecting their lifestyles and only a portion of those funds should be devoted to any one trade because traders cannot expect to profit on every trade. BrokerTec Americas LLC (“BAL”) is a registered broker-dealer with the U.S. Securities and Exchange Commission, is a member of the Financial Industry Regulatory Authority, Inc. (www.FINRA.org), and is a member of the Securities Investor Protection Corporation (www.SIPC.org). BAL does not provide services to private or retail customers.. In the United Kingdom, BrokerTec Europe Limited is authorised and regulated by the Financial Conduct Authority. CME Amsterdam B.V. is regulated in the Netherlands by the Dutch Authority for the Financial Markets (AFM) (www.AFM.nl). CME Investment Firm B.V. is also incorporated in the Netherlands and regulated by the Dutch Authority for the Financial Markets (AFM), as well as the Central Bank of the Netherlands (DNB).
