While the surge in stock prices has drawn public attention to the once widely shunned equities markets, futures trading continues to hold its own.
"The money headed to the stock market isn't coming out of the futures market as you might suspect," said one Washington brokerage official. "Its coming from the billions of dollars of cash that have been sitting on the sidelines for the last few years taking advantage of high interest rates."
During the first 11 months of the year, the number of contracts traded on the nation's 11 futures exchanges grew by 15 percent, from 89.7 million contracts in 1981 to 103.1 million so far this year.
But the overall figures mask some major changes that have occurred in futures trading.
Traditional commodities, the mainstay of futures trading for decades, are in the doldrums, while hot new futures investments are proving the rage. So-called financial futures -- from those based on government securities to foreign exchange to the recently introduced contracts based on stock indexes -- have more than taken up the slack left by declining investor interest in wheat, corn, sugar, coffee and cattle.
As a result, the Chicago Board of Trade, still the futures industry's most important marketplace, has lost its share of the total futures market, even though the volume of trading at LaSalle Street and Jackson Boulevard remained constant at about 44.7 million contracts.
For the first 11 months of 1981, 49.8 percent of all futures contracts traded in the United States were executed on the Board of Trade. So far this year, only 43.3 percent of the market belongs to the pits of the Chicago board.
Its wheat, corn, soybean and plywood pits have been quieter this year than last, and although the Chicago board pioneered the decade-old financial futures industry, only its Treasury bond contract is proving more popular than in 1981. The board has no contracts based on stock indexes -- such as rival Chicago Mercantile Exchange's Standard & Poor's 500 contract or the New York Futures Exchange's contract based on its sister New York Stock Exchange Composite Index.
Those stock index contracts have been the hottest entrants in the rapidly growing financial futures game as the futures industry benefits from the boom in the stock market that began last August. As the Dow Jones Industrial Average surged from below 800 to above 1,000, interest and trading in futures contracts based on stock performance have burgeoned as well.
No stock index contracts existed until the middle of the year. Since their introduction, more than 4 million have been traded on the three futures exchanges that offer them: the Chicago Mercantile, the New York Futures and the Kansas City Board of Trade.
The Chicago Board of Trade, which still relies for more than half its volume on traditional agricultural commodities, has been trying to introduce its own index based on the Dow Jones average. Dow Jones has been fighting the attempt, so far successfully.
Frank Hochmeier, who heads futures research for Merrill Lynch, Pierce, Fenner & Smith, the nation's biggest broker, said that in recent weeks prices have been increasing -- and interest perking up -- in traditional commodities, a development that will help old line exchanges like the Chicago board.
But analysts such as John Coffin -- head of commodity trading at Drexel Burnham Lambert Inc. -- see little chance for an overall surge in traditional commodities futures because of bountiful crops in the United States and the continuing recession.
The action will be primarily in financial futures and precious metals, they say.
Futures trading has been around for decades, but, until the last 10 years, it mainly was the province of the users and producers of commodities, who sought to protect themselves against adverse price movements, and speculators, who tried to make a profit by betting against the hedgers.
The standard futures contract is a promise to make or take delivery of a fixed amount of a certain product at a specified price and date.
A miller who wants to make sure his wheat costs will not rise above a certain level for a year might promise to buy (a hedge, as it is called) 5,000 bushels (contracts are written in standard amounts) at $3.50 a bushel.
If the price rose above $3.50, the miller had protected his costs because the seller must pay him the difference or deliver the wheat at $3.50 a bushel. If the price falls below $3.50, the person who promised delivery makes a profit. The miller lost the chance to buy cheaper wheat, but that was a chance he was willing to forego in order not to risk a severe price escalation.
Only a few commodities contracts were ever settled by delivery of the underlying product. The contracts were settled for cash. If the speculator promised to deliver 5,000 bushels of wheat at $3.50 and the price rose to $4, the speculator paid the miller 50 cents a bushel, or $2,500.
Because the amount of money either the buyer or the seller of a futures contract initially must put down (the margin) is substantially smaller than the value of the commodity that underlies the contract, futures trading is attractive to hedgers and speculators. A hedger can protect his costs for a relatively small outlay while the speculator can make a large profit (or a large loss) on a similarly small margin.
In the 1970s, financial futures were introduced. The contracts were based on Treasury bills, Treasury bonds, Government National Mortgage Association securities and foreign exchange.
These futures gave individuals and companies the opportunity to hedge interest rate risks and gave speculators a new avenue to make profits. This year, with the introduction of the stock index futures, hedgers can ensure that their stock portfolio does not substantially underperform average stock prices.
Each new futures contract gave speculators new ways to make money. When stocks and bonds hit the doldrums in the mid-1970s, the futures markets became more attractive as a vehicle for making money.
Brokerage houses, which had given futures short shrift, found their commodities and futures departments earning money at a time when commissions on stocks were declining.
Today, with traditional commodities trading suffering, for the most part, it is the financial futures segment of the industry that is making money for the futures departments, according to Drexel Burnham's Coffin.
"In the traditional agricultural markets there has been such an oversupply that there has been virtually no price movement" for months, Coffin said. Without the prospect of changes in price -- and, therefore, the potential of making a big profit on a relatively small investment--speculators are having little to do with futures contracts in agricultural commodities.
Such large surpluses also give hedgers less reason to participate in futures markets.
Other traditional futures markets have been suffering too. Oil and oil products are in oversupply and prices are declining; the severe recession has reduced industrial demand for metals.
But don't weep for futures brokers, both Coffin and Merrill Lynch's Hochmeier say. Nearly 22 percent more contracts were traded on the nation's futures exchanges last month than in November 1981.