Why do Indexes lose volatility?

F

fseitun

I would like to understand why Indexes like ES lose their volatility at some point in time.

Any expert in here that can provide sound reasons as of why indexes become less volatile and more difficult to trade?

Do they become more efficient?

Right now ER2 and NQ seem to be the hot futures indexes to trade. I am sure at some point in time either of them will become less attractive and perhaps YM will become the hottest thing.

Why does this happen?
 
Quote from Trader273:

I dont think the YM will ever be the "hot market" to trade.
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Thanks for replying. If you read my post, i clearly stated YM as an example.

Do you have anything more insighftul other than saying YM won't ever be the hot thing?
 
I agree with you ES. Futhermore, before the battle of the bots began, markets were expanding and contracting. It's to be expected. Can't complain about today's volatility.
 
i believe low commissions are part of it. if you can have traders flipping for a tick all day and still make a profit they will do just that and kill volatility in the process
 
Thanks to all those who stepped in and left a comment.

Thus far we have two valid arguments supporting drops in volatility in certain instruments:

1. Computer programming, i.e. automated trading systems that make markets more efficient

2. Trading is accessable to almost anyone nowadays, and there is a particular category of traders, called SCALPERS, who kill each other for a couple of ticks and cause markets to be stuck in tight ranges.


Is there anyone out there who can either add to or expand on the above points?

For instance, ES used to be a very good instrument to trade and had wonderful volatility before turning dull in 2001-2002.

Then, ER2 picked up on volatility and became the best replacement for ES in terms of price swings and price action.

Recently NQ's minimum tick was adjusted from .50 to .25, hence doubling up its daily number of ticks.

Right now ER2 and NQ are the best trading instruments in the US in terms of volatility.

Europe offers an even more volatile instrument, the DAX.

Has ES become scalpers' favorite trading instrument?
 
Quote from fseitun:

I would like to understand why Indexes like ES lose their volatility at some point in time.
More...

Do you have something tangible with respect to this statement? Something more empirical?

Market participants are always attempting to find value - the more inclined the longer terms participants are in acting out (i.e. trading) their perception of value, the better range extensions and market moves we will have. I'm not sure what you're trying to imply with your comment ~ are you asking at what point will people want to just stop participating in the ES auction? My answer: 1. Who cares? 2. Likely never. 3. The ES is an intangible product, just like the YM, ER, NQ etc etc... so it doesn't matter what the product represents (if anything at all) as long as there are people willing to participate.

EDIT: You are ignoring the price/volume ratio. Keep in mind you can throw pretty much any volume you want at the ES - not so with other SIFs...
 
Quote from Mike805:

Do you have something tangible with respect to this statement? Something more empirical?

Market participants are always attempting to find value - the more inclined the longer terms participants are in acting out (i.e. trading) their perception of value, the better range extensions and market moves we will have. I'm not sure what you're trying to imply with your comment ~ are you asking at what point will people want to just stop participating in the ES auction? My answer: 1. Who cares? 2. Likely never. 3. The ES is an intangible product, just like the YM, ER, NQ etc etc... so it doesn't matter what the product represents (if anything at all) as long as there are people willing to participate.

EDIT: You are ignoring the price/volume ratio. Keep in mind you can throw pretty much any volume you want at the ES - not so with other SIFs...
More...

Yes, I do have something empirical...just took it for granted that almost everyone in here knew that ES's volatility dramatically collapsed since 2002.

Avg daily range in 2000 was in the 30s, in 2001 between 20 and 30, same with 2002.

And here is the empirical proof volatility dropped: since the second half of 2003 ES has been averaging between 10 to 15 pts per day.

From 30 pts per day to 10 pts per day is a major drop in volatility.

Basically ES is moving within a range 3 times tighter as opposed to 5-6 years ago.

The interesting thing, as you hinted in your post, is that since the second half of 2002 volume more than doubled, averaging well above 1m contracts per day nowadays. This certainly makes it the most liquid of all indexes.

The scope of this thread is on volatatility and what makes markets like ES less volatile and more liquid.

Why does that happen?
 
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