index futures at 4:30 in an electronic market called Globex. Globex has no
centralized floor, and traders post their bids and offers on computer
screens where all interested parties have instant access. Trading in
Globex proceeds all night until 9:15 the next morning, 15 minutes before
the start of stock trading in New York.^6
Index futures trading can be active just after the close of regular trad-
ing on the NYSE and Nasdaq. This trading is especially popular in the
weeks following the end of a quarter when many firms release their earn-
ings reports and give guidance about future earnings and revenues. Unless
there is important breaking news, trading is usually slow during the night
hours, although activity can pick up if there is dramatic movement on the
Tokyo or European stock exchanges. Trading again becomes very active
around 8:30 a.m., when many of the government economic data, such as
the employment report and the consumer price index, are announced.^7
Market watchers can use the Globex futures in the S&P, Nasdaq,
and the Dow to predict how the market will open in New York. The fair
market valueof these index futures are calculated based on the arbitrage
conditions between the future and current prices of stocks.
The fair market value for the futures contract is determined on the
basis of the current index value when markets are open and on the pre-
vious closing level when markets are closed. Because of the continuous
stream of news, the futures price overnight will usually be either above
or below the fair market value computed at the close. If, for instance, bet-
ter-than-expected earnings reports came out after the market closed,
then the futures price will trade above fair market value computed on
the basis of previous closing prices. The amount by which the futures
price trades above or below its fair market value will be the best estimate
of where stocks will trade when the exchanges open. Many financial
news channels post the overnight trading in the S&P 500, Dow, and Nas-
daq futures to inform viewers of the likely opening of the market.
The formula to calculate the fair market value depends on two vari-
ables: the dividend yield on stocks and the interest rate. If an investor
puts a sum of money today in risk-free bonds, that sum will earn interest
at the ongoing interest rate. If instead the investor buys a portfolio of
stocks and simultaneously sells a one-year futures contract that guaran-
tees the price of those stocks one year from now, the investor will earn theCHAPTER 15 The Rise of Exchange-Traded Funds, Stock Index Futures, and Options 259
(^6) In Chapter 13, we examined the reaction of S&P futures to the terrorist attacks on the morning of
September 11, 2001.
(^7) In Chapter 14 we noted the dramatic fall in the S&P futures traded on the Globex that occurred in
response to the strong July 5, 1996, employment report.