The closest thing to trading index futures

In an earlier post I described how concentrated the world's market values are now in a small number of American companies. There are many ways to trade and invest, but in short-term trading parameters such as liquidity and volatility are undoubtedly central. You want to trade something that fluctuates quite a bit, and where you can get in and out with relevant amounts without it costing too much in trading costs such as spreads, broker-fees, and currency exchange.

The greatest liquidity is in the US indices S&P 500 and NASDAQ 100, and a number of derivatives (futures, options, and trading products) are traded on these. Next come the largest US individual stocks, and their associated derivatives/trading products. Daily fluctuations in the indices are typically in the range of 1.4-2.4% for the NASDAQ and 1.1-1.8% for the S&P 500. The individual shares fluctuate more, often 2-5%. This makes them attractive to traders.

An example I like to use is the following: Let's say one day you believe a short-term boost in tech is imminent and want to take a position accordingly. On Oslo Børs, Nordic Semiconductor (NOD) is the largest and most liquid of the technology stocks, so it can provide relevant exposure. At the time of writing, NOD is traded with a 0.11% spread in the market between best buyer at 131.45 and seller at 131.60. However, there are only a few tens and hundreds of shares in the order book at these levels. If you were to have 5,000 shares for a trade, you would have to be prepared right now to push the market price to 131.80 in order to fill the order. Based on the order book, one would also risk pushing it to 131.25 to get out again. This involves a real spread cost (so-called "slippage" of 0.35% to quickly take on and off a trading post of approx. NOK 660.000, -. In practice it would often cost more, as prices start to move when you try to get in and out.

Can the tech bet be taken in another way? Yes, but you have to look outside the country.

Nordic Semiconductor is, as the name suggests, a semiconductor company, and will often have daily fluctuations in line with the international sector of which it is a part of. Europe's largest tech company is called ASML, and is the world leader in equipment for making semiconductors. The stock trades around EUR 660 and is listed on the stock exchange in Amsterdam. Instead of 5,000 NOD, one could thus instead buy 100 ASML for the same amount. You could easily do this within the 10 eurocent normal spread between the buying and selling price, corresponding to 0.02%. As we can see, the spread cost for this trade is in the region of one tenth to one fifteenth compared to that of trading NOD. But one must have trading access to the Dutch market, and in addition exchange EUR for NOK to make the trade.

Is there another good alternative for a similar trade? Yes.

The EU's largest technology company ASML is also listed on the NASDAQ in the USA and is actually among the top shares in the NASDAQ 100 index. On an intraday basis, ASML often fluctuates in the same rhythm as the NASDAQ 100. An alternative for such an intraday trade is thus to trade directly in the index instead of ASML. The cleanest way to take positions in the NASDAQ 100 is through index futures. As mentioned above, these are among the world's most traded securities, and the liquidity is enormous. The spread cost for taking on a trade in these is practically negligible. But futures trading is essentially a market for professionals. The minimum positions are large, as 1 futures contract currently corresponds to approx. NOK 2.6 million. There are few or no Nordic brokers that offer direct electronic trading in these. You must have a US derivatives account to be able to trade such contracts, and in addition deal with exchanging USD for NOK.

Is there another good alternative more suitable for private players for a similar trade? Yes.

The underlying liquidity in both the index futures and in the currency market is very good. Several banks and brokerages therefore use this to create exchange-traded products (ETPs) and a large number of these are available for trading on the NGM exchange in Stockholm. ETPs are often offered in series with different leverage and as variants where you can go either long or short. BULL NQ100 X3 VN1 indicates, for example, that the product has the NASDAQ 100 (NQ100) as reference asset, is 3X intraday leveraged (3X) and that the issuer is Vontobel (VN1). The products are usually offered in local currency, so investors do not have to make FX exchange.

Good liquidity in the underlying futures and currency markets means that the issuer can offer a low spread on such products. At the time of writing, it is 14:15 and the above-mentioned product has a spread of 0.02% between the seller and the buyer price. The volume that lies with both the best buyer and seller corresponds to approx. 27 million NOK, so here it is easy to put on and take off even relatively large positions.

However, traders must remember to take the leverage effect into account. If you want a "long tech" intraday exposure corresponding to the above-mentioned example of NOD 5,000 (NOK 660,000), you can e.g. buy this 3X geared product for NOK 220,000. Trading such products is perhaps the cleanest and closest private traders will come to trading index futures, as they provide a tight indirect exposure to these. Remember, however, that such products are intended for intraday trading, and that it is important to familiarize yourself well with how they work. A total loss of your investment is possible.

In addition, investors in ETPs bear the credit risk of the issuer, i.e., the risk that the issuer is not able to meet its obligations under the products. Fees and costs in the products impact the performance of the products.

There are several brokers in the Nordics who provide trading access to the Nordic Growth Market, and thus ETPs with American indices and stocks as underlying. If your broker is not among these, you can always encourage them to consider establishing this. It is generally not a good thing to fall behind the competition.