You cannot comprehend the short term stock market movements without an understanding of stock index futures and ETFs.So how do stock index futures affect the stock prices in the short term? To understand how much important stock index futures are to the stock prices, we only need to take a look at what happened on April 13th 1992. On that day there were massive leaks from the Chicago River into the tunnels under the financial district that triggered massive power outages.
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Both the Chicago Mercantile Exchange and the Chicago Board of Trade had to be closed down. As soon as the stock index futures trading was halted in these exchanges, the volatility in the stock market declined significantly. The volume in the New York Stock Exchange (NYSE) declined by 25% on that fateful day. There were severe liquidity problems and difficulty in executing some trades in NYSE on that day.
Who is responsible for such volatility in the stocks? You might have heard about the Program Traders. What do these program traders do? Program traders rely on the differences between the prices of stock index futures traded on the Chicago Exchanges and the component stocks traded on the NYSE. So there is a lot of interrelationship between the stock index futures trading and the stock prices in the short run.Discover a unique trading system that can trade all the market stocks, futures, forex, options, bonds, commodities, ETFs:
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Don't forget, stock index futures came of age on October 19th, 1987 when a major stock market crash was caused by the something known as portfolio insurance. Portfolio insurance is the sale of the futures contracts to protect losses in individual stock positions. So today we live in the era of one market in which stock index futures and the stock market have become a single entity.
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