Thursday, August 20, 2009

How Stock Index Futures Move During the Trading Day

Above we see the median high-low price range for each half-hour period in the S&P 500 e-mini (ES) futures. (Note that the final period at 15:00 CT is the 15-minute "after hours" period). If you correlate these ranges with the median half-hour volume figures posted recently, you'll see the close correlation of volume and volatility.

(Note: these data go back to mid-June when the current contract became the front month. They are based on the latest 45 trading days).

What we see is the "smile" pattern of intraday volatility: highest early and late in the day. Observe how market movement tails off significantly after the first 90 minutes of trade. By the 10:00 - 10:30 half hour, we're seeing only half the average movement that we typically see in the first half hour of trade.

For much of the midday, we average only about .30% as a high-low range per half hour. That is about three S&P 500 e-mini points. Those hoping for large moves in the midday have, on average, been sorely disappointed.

Interestingly, volatility doesn't really pick up until the final half hour of the trading day. Hence the perception of many daytraders that their best trading comes very early and very late in the day session.

If you go back to that earlier post, however, you'll see something subtle: the standard deviations of volume through 11 AM CT and then from 13:30 PM CT on are elevated relative to the midday hours. Since volume correlates with volatility, that tells us that many busy days are busy because volume (i.e., institutional participation) persists beyond the first 90 minutes and the last 45 minutes of the day.

In other words, we don't want to just see how each half hour's volume is stacking up: we want to see, in relative terms, how volume patterns are shifting within the day. It is when we see sharp dropoffs in volume that we're most likely to see reduced volatility and a slow, range trade. Conversely, when volume picks up during the day on a relative basis, that tells us that institutions are finding unique opportunity at times of day when they might ordinarily be quiet. That is important information.