For any US equity index futures contract traded on a CME Group exchange, the final settlement price is based on the special opening quotation (SOQ) of the contract’s underlying reference index on the contract final settlement day. The SOQ is determined by normal calculation procedures, using the opening (first reported) sales price on the primary listing exchange1 for each of the index’s component stocks.
This note details how the SOQ works and why it matters. In what follows, Section 1 surveys the building blocks: the index procedures that define the SOQ, and the exchange opening processes that govern determination of the opening stock prices that feed into SOQ calculation. Section 2 compares the SOQ to various familiar gauges of daily index dynamics, including the opening value, the high, the low, and the close. Section 3 remarks upon why the SOQ is the measure of choice for determining futures final settlement prices. To keep the discussion manageable, we focus on SOQs for two prominent US equity price indexes: the S&P 500 (SPX) and the NASDAQ-100 Index (NDX).
For SPX, the primary listing exchange for each index component stock is either the New York Stock Exchange (NYSE) or the NASDAQ Stock Market (NASDAQ). NDX is based entirely on stocks for which NASDAQ is the primary listing exchange.
Exchange Opening Processes
Both NYSE and NASDAQ (as well as other US primary listing exchanges) conduct opening auctions.2 Although procedural details vary from one exchange to another, in all cases the general aim of the opening auction in a stock is to start its daily trading session at whatever price maximizes the quantity of shares crossed between buy and sell orders submitted for participation in the auction.
For a NASDAQ-listed share, the price determined through the exchange’s Opening Cross3 becomes the NASDAQ Official Opening Price (NOOP) for that stock. The Opening Cross process is fully automated and is typically executed at 9:30 am, when regular market trading hours begin.4 Should an Opening Cross fail to occur for a stock, the NASDAQ system designates the stock’s NOOP on the basis of the first eligible trade execution reported at or after the start of regular market trading hours.
The NYSE opening auction process relies to a comparatively greater degree upon that exchange’s cadre of Designated Market Makers (DMMs).5 Trading in a NYSE-listed share does not begin until the DMM for that stock has formally opened it for trading. “The DMM may open a stock manually or electronically, on a trade or a quote, at 9:30 or thereafter, and the opening should be, according to NYSE Rule 123D, ‘fair and orderly, reflecting a professional assessment of market conditions at the time, and appropriate consideration of the balance of supply and demand as reflected by orders represented in the market.’”6
NYSE rules stipulate that “it is the responsibility of each DMM to ensure that registered securities open as close to the opening bell as possible…, while at the same time not unduly hasty, particularly when at a price disparity from the prior close….”7 As a practical matter, however, not all opening auctions can or will occur on the opening bell, and completion of the process may take several seconds or, on occasion, several minutes.8
Index Protocols for SOQs
On any given day, the SPX SOQ is calculated in accord with standard SPX index methodology, on the basis of the day’s official opening prices of index constituent stocks as set on the corresponding primary listing exchanges.9 For NDX, the SOQ is determined on the basis of the NOOPs of index component stocks, for which calculation and dissemination occur soon after the market opening (typically around 9:40 am).10
An index SOQ cannot be calculated and published until all of the index’s constituent stocks are opened for trade and the corresponding official opening prices are established. Because official opening prices are rarely determined right at the opening bell, the SOQ is, by construction, anchored to no specific time of day. Similarly, by construction the SOQ is associated with no particular intraday relative index level.
These distinctions set the SOQ apart from more familiar daily index milestones such as the open, high, low, or closing values, all of which are continuous calculations. Among the implications is that, on the final settlement day of an expiring equity index futures contract, the value of the contract’s underlying index SOQ may be higher than the index high for the trading session, or lower than the index low, or different to the index open.
For illustration, consider the 33 quarterly final settlement days for CME equity index futures between March 2009 and March 2017, inclusive. Exhibit 1 shows differences between SOQs and corresponding index opening values (where each such difference is normalized as a percentage of the corresponding opening value). For SPX the distribution of such differences is centered on +0.4 percent, and it ranges from -1.0 percent to +1.0 percent. For NDX, the distribution of such differences is less broad, ranging from -0.3 to +0.6 percent, centered on a median value just under +0.2 percent. (These data underscore that – unlike the index SOQ -- the index “opening value” is at best a misnomer, given that the prices of index constituent stocks that enter the calculation of the opening value frequently are stale prints from the prior day’s close.)
(100 x (SOQ minus Index Open)/(Index Open) on CME equity index futures final settlement days, Mar 2009 through Mar 2017)
(CME equity index futures expiration days, Mar 2009 through Mar 2017. For each futures expiration day, SOQ, Index High, and Index Low, are normalized as number of Index points above or below the geometric mean of that day’s Index Open and Index Close.)
Exhibit 2 dramatizes the frequency with which an index SOQ value is apt to breach the index high-low range for the ensuing trading session. On 11 occasions -- one out of every three instances in the sample at hand -- the SOQ value for SPX exceeds the day’s high. By contrast, only once has the SOQ been less than the day’s low. The relationship among SOQ, daily high, and daily low for NDX exhibits similar characteristics.
Finally, Exhibit 3 conveys a sense of the extent to which these indexes are prone to gap openings, as gauged by the difference between the SOQ and the previous day’s index closing value (where, as above, each such difference is expressed as percentage of the previous day’s closing value). For SPX the median difference is nearly +0.5 percent, with values ranging from -1.0 to +1.1 percent. For NDX, the median difference is comparatively modest, just under +0.3 percent, but outcomes range more widely, from -1.3 to +1.2 percent. It’s worth noting that on five occasions -- 15 percent of the historical stretch at hand -- NDX SOQ values have gapped either higher or lower by (absolute) magnitudes exceeding 1.0 percent.
(100 x (SOQ minus Previous Day’s Index Close)/(Previous Day’s Index Close) on CME equity index futures final settlement days, Mar 2009 through Mar 2017)
SOQ vs Opening Value
From time to time, market participants ask why futures contract final settlement prices are based on underlying index SOQs. Why not index opening values instead? The short answer is that the SOQ is both internally coherent and actionable in ways that the index opening value is not.
We remarked above that index component shares often do not officially open for trading at the opening bell. For such stocks, the index administrator typically evaluates the index opening value using the previous trading session’s official closing prices. In any such instance, the index opening value thus becomes an amalgam of current (today’s opening auction) prices and stale (yesterday’s closing auction) prices, unrepresentative of actionable market valuations, especially on days when share prices have gapped higher or lower at the opening bell. (See Exhibit 1.)
Because the SOQ is computed strictly on the basis of official opening prices of index member stocks, it is a comparatively direct reflection of the balance of actionable orders submitted on the primary listing exchanges for participation in opening auctions.11 To the extent that the SOQ holds greater plausibility as a replicable cash-market index strategy, it offers a stronger measure of assurance that the expiring futures contract final settlement price has indeed converged to an actionable cash-market level of the contract’s underlying index.
SOQ vs Closing Value
More frequently, market participants ask why futures contract final settlement prices aren’t based on the closing values of the corresponding underlying indexes. It’s a sensible question, if only because that is how equity index futures final settlement prices were determined up until 19 June 1987. On that day, the SEC, the CFTC, and the major US futures exchanges and equity option exchanges jointly shifted the reference point for SPX contract final settlement prices from index closing values to index SOQs.
The chief motive for this move was concern among market practitioners and regulators over the “triple witching hour” -- the interval just before the close of market trading on the third Friday of every March, June, September, or December, when equity index options, equity index futures contracts, and options on equity index futures all used to expire simultaneously. This confluence made for an incendiary mixture: concentrated transaction volumes, congested market action, lopsided trading flows, heightened risk of outsized market-on-close orders, and urgency to fill such orders, all within a tightly confined time frame. Too often, it strained the ability of liquidity providers and DMMs to manage their order books, occasionally leading to eccentric price movements on the close. The industry-wide shift to Friday morning final settlements for SPX contracts, by reference to the index SOQ, was made to ensure that DMMs, specialists, and other liquidity providers would have more time – in effect the entire ensuing trading session – in which to “resolve publicly disseminated and often large order imbalances.”12