I’ve been contributing a daily review and forecast for the S&P or Nasdaq futures for over a month because this is the market I personally trade. However, individuals coming to disintermediated, zero-sum markets such as futures from other “normal” markets such as equities, may not be aware of the critical differences.

Asset markets such as stocks serve institutions and the general public. About 50% of households are invested in the stock market, whereas futures markets have traditionally served just three specialized groups: hedgers, high net worth speculators, and pit traders (aka “locals”). With different players at the table, different agendas play out.

While Commodity Trading Advisors have an excellent long-term track record (they typically outperform the S&P 500 and most hedge funds), anecdotal evidence for the success rate of individual amateur futures traders suggests that the deck is definitely stacked against us.  

Let The Games Begin

In the equity market, market makers at large banks and brokerages hold stock inventory and make a profit on the spread. Market makers provide liquidity when no one else will, which moderates price fluctuations. You can see the identity and real time bid-ask of these operations on a Level-2 screen provided on most equity trading platforms.

In zero sum markets (contract markets) such as futures, however, there are no designated market makers. The contract holders themselves (long or short) provide all the liquidity and large orders (called icebergs) can be easily hidden using modern computer technology. This makes for a bumpier ride and enables all sorts of tricks and traps.  

Mean Reversion

Asset markets, such as the stock market have a long-term bullish bias, which enhances trending characteristics and smooths out volatility, whereas this is not the case with futures. Anecdotally, 80% of algorithms operating in the futures markets are mean reversion counter trend strategies. Most aspiring futures traders are not prepared for that.

The Bottom Line

Seduced by stories of quick gains on small, highly leveraged accounts “mom & pop” retail screen traders operating from a home office are sitting ducks for the professionals. According to my brokerage contacts, at around 18 months, after re-funding the account three times, the average futures trader quits. In trader jargon, the process is called “wash and rinse.”

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