It has been reported that the stock index futures and options are to blame for the volatility of the stock market. This doesn't sit well with most traders who mostly believe that this volatility is the result of market fundamentals, and not because it is being forced by a financial tool. That is like saying that guns don't kill people, people do, which is the motto of the National Rifle Association. Stock index futures simply make it easier for the stock market to do what it wants to do.
This analogy seems to be correct. Options and futures appear to make it possible that the downward trips will be dangerous, although they might not force the market down when it wants to go up.
It is easy to define an index future is. It is nothing more than a contract to buy a commodity, like hogs or corn, at a certain time and price in the future. In 1982, the first stock index futures were traded and commodity was nothing more than stocks. In accordance with the movement in price of 500 different stocks, the value of the Standard and Poors stock index futures contract will either fall or rise. The only difference between stock index futures and pork belly futures and is that if something goes very wrong with the first the country could suffer a financial collapse and in the second, a financial collapse.
Sometimes there are warnings about the relationship between computerized program trading and stock index futures that can be heard on the news. This usually occurs when the stock market's high is briefly interrupted with some kind of downturn. However, most of the executives on Wall Street play down those complaints that these could also result in some serious trouble.
Since some of those people doing the warning should know, this is very unfortunate. When the stock market enters the last turn in its race to the finish, the New York Stock Exchange chairman will, as likely as not, suggest that recent trading strategies in combination with stock index futures could result in market to experience a meltdown. There was a time when this wouldn't be the case but with the volatility of the current market it is a real possibility. The destruction could really happen with a point drop of 600 or 700 points. It could actually undermine the market's credibility.
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