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As many of you know, I write a daily Industry News e-mail and send it out to
a variety of different people. These two stories were part of my Lead
Stories section and M.Simms picked up on the significance and the
juxtaposition of the headlines.
To me it is significant that the e-mini contracts at the CME has continued to
thrive, while volume on the online individual stock side has been cut from
the frothy levels of last year. In fact, there were some interesting
statistics that came out of several of the stories on my e-mails. The
average size of an account at Datek was down about half from last year and
several online stock brokers found it hard to make money. Talk about
industry consolidation is in the air.
On the futures brokerage retail side, some firms' index volume is as much as
75% of their overall volume. E-mini contracts make up a big part of that.
To a certain extent indices have benefited from the huge volatility
experienced by traders of individual stocks. Futures used to be the Wild
West of trading and investing. There is tremendous leverage involved there
no doubt, and sometimes the index markets move so fast and so badly for some
traders that you could not have physically burned the cash in the time it
took for them to get in and out of the markets. However, this is pale in
comparison to the risk adjusted return of some of the high flyer tech stocks
that we have seen in the last year or so.
There are 4 trends I have seen since stocks have proved they can go down too.
First is the decline in the online trading volumes on the stock side.
Secondly, is the value of focusing on trading indices, either futures or
mutual funds. Thirdly, is an increased interest in alternative investment
strategies, i.e., managed futures and hedge funds. See this week's Business
Week for coverage about that. Lastly, I see no talk on the securities side
about Single Stock Futures.
At last week's Managed Futures Association conference there were several
stories about the dim prospects for Single Stock Futures. Why would futures
traders use to paying 5 - 10 and 20 percent margins want to put up 50%
margins to trade Single Stock Futures? A better question for me is, "why
wouldn't stock traders attracted to index futures trade single stock futures
also?"
The list of potential competitors for single stock futures is large. ECNs
are registering as exchanges, some both futures and securities exchanges.
There are ongoing and serious talks to merge the Options Clearing Corp. with
the Chicago Board of Trade Clearing Corp. This would allow for greater
margining and offset efficiency for options, futures and single stock futures
all at the same clearing house. One of the reasons for the success of the
multiple listing of stock options is that all the exchanges share the same
clearing house. The currency they all deal in is the same.
Single Stock Futures would share this similarity in a couple of senses.
First, is potential for the trades to clear the same clearing organization,
the OCC/CBOTCC if the merger takes place. Secondly, Single Stock Futures
would trade in a market that the retail public knows and that the general
public has cheap and easy access to trade in the cash market. There is no
more simpler commodity to trade or take delivery of than stocks. Even blue
haired old ladies do it. Thus, if you buy a futures contract on some
exchange, while liquidity is still developing, you may find the best way to
exit the trade is to sell the cash stocks against it. Would there be an
exchange for physical market to unwind such a position? I think there would
be. Thus, traders will have the ability to trade stocks or futures on many
different venues and not have to worry about the liquidity to unwind the
trade.
This is my optimistic view of the one aspect of the viability of Single Stock
Futures. Some would say I am overly optimistic. I can accept that. In my
Industry News letter I commented about how the Chicago Banks were offered the
opportunity to become members of the CBOT and offered good locations on
financial trading floor before the introduction of the U.S. Treasury Bond
futures. The declined, thinking the futures would not important. Six months
later they were pounding on the door to become members and get floor space.
I have not heard much out of the online stock trading community about Single
Stock Futures. I don't see much movement there, strategically speaking, to
position them for it. On the otherhand, I see firms like Refco and my
clearing firm ED&F Man International, Inc. acquiring firms (read order flow)
on the futures side.
Is there a cross pollination of futures firms acquiring online stock trading
brokerage firms coming in the near future? Or, will we see the opposite
happen? Will a large Wall Street firm decide it needs to get back into the
futures market by buying one of the bid futures FCMs? Only time will tell.
The interesting times we in the trading community live in now requires paying
attention to the structure of the industry and the bigger picture, because
there is so much change going on. That was one of the reasons I started
writing my Industry News e-mails. Certainly it is good marketing to get my
name out in front of a lot of people. That is what I get out of it, along
with the included Good Will. What my readers get is headlines and hyperlinks
to stories about what is going on in the futures and securities industries.
I also include some of my own commentary about what I see happening in the
industry. I include notices and press releases from the exchanges,
regulators, ECNs, industry associations, brokerage firms and stories from key
word searches of a couple of search engines. There is little to no
self-serving commercial element in the e-mails. I will occasionally make
announcements or include references to my own online trading operations or
managed futures offerings, where appropriate, but these are few.
The types of people receiving the e-mails include clients, prospects,
friendly competitors, exchange members, exchange staff, regulators,
securities brokerage staff, futures brokerage executives, media, quote
vendors, ethics trainers, trading software staff, CTAs and other individuals
who I have come across on the Internet or in the industry meetings.
A recent story from the Securities Industry Association said online brokers
need to do a better job of teaching their clients about the markets and the
risks involved in trading. I agree. In a small way I hope my e-mails and
commentary helps recipients to achieve part of that goal. And educated and
informed trading community is a better one for all of us; brokers, traders,
exchanges, regulators.
If you would like to see my e-mails for yourself and be added to my
distribution list, just send me an e-mail asking to be added.
Regards,
John J. Lothian
Disclosure: Futures trading involves financial risk, lots of it! John J.
Lothian is the President of the Electronic Trading Division of The Price
Futures Group, Inc., an Introducing Broker clearing ED&F Man International,
Inc.
In a message dated 2/16/01 12:48:10 PM Central Standard Time,
prosys@xxxxxxxxxxxxxxxx writes:
<< CME E-mini S&P 500, E-mini Nasdaq 100 Futures Set Volume Records
Feb. 15, 2001—Trading volume in E-mini S&P 500 and E-mini Nasdaq 100 futures
rose to new record levels on Chicago Mercantile Exchange Inc. yesterday, as
138,187 E-mini S&P 500 futures and 126,045 E-mini Nasdaq 100 futures changed
hands.
The new records surpass those set on Oct. 10, 2000 and Jan. 10, 2001, when
132,063 E-mini S&P 500 and 117,021 E-mini Nasdaq 100 futures contracts were
traded.
Both E-mini equity index futures contracts—the fastest growing contracts in
the history of the exchange—are traded electronically on CME’s GLOBEX®2
trading system and are smaller-sized versions of contracts traded actively
via open outcry on the exchange’s trading floor. E-mini index trading occurs
virtually around the clock from 3:45 p.m. until 3:15 p.m. the following day.
http://www.cme.com/news/01-20volume.html
Schwab Trading Volume Down, May Hit Earnings
http://dailynews.yahoo.com/h/nm/20010215/wr/financial_charlesschwab_dc_2.htm
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