Market index futures contracts have captured much investor and broker attention and achieved substantial trading volume. Their success can presumably be traced to their ability to lower transaction costs for both hedgers and speculators. As an instrument for shorting the market, their advantages are particularly significant.
More importantly, market index futures contracts provide a streamlined instrument for capturing information, which is fed back to the spot market. This is demonstrated, not only by the heavy trading in the contracts, but by the evidence that futures prices move more rapidly to equilibrium value than spot prices and that futures prices often lie below the spot prices, despite the time value of money.
The most interesting hypothesis suggested by experience to date is that the futures index may, under some circumstances, be of independent value in predicting movements in the spot price. The record is brief and inconclusive; in particular, traders may not yet have accommodated themselves to the new set of opportunities offered by market index futures. Nevertheless, if, over the long run, the futures price for the index does prove helpful in forecasting the spot price in some identifiable circumstances, some of the more fundamental assumptions of modern finance theory will have to be reconsidered.