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At 10:57 AM -0600 11/28/01, Gerald Marisch wrote:
>"...single-stock futures..."
>
>Can you tell me more?
>Is there a web site?
Quoted below is some info from John Lothian's great (free)
email newsletter. I hope he doesn't mind my quoting it.
Bob Fulks
----
From:
<http://www.pricegroupetd.com/112601.html>
Below is an essay I wrote for distribution at the Futures Industry
Association Expo this week.
Single Stock Futures: I am a True Believer
I am a true believer in Single Stock Futures ("SSF") and their
industry changing potential. I have been since a light bulb clicked
on above my head the first time I heard the phrase while reading news
reports about the testimony before Congress that led to the Commodity
Futures Modernization Act ("CMFA"). I believe SSF are the single
most important new product ever introduced in the futures industry
and will forever change its face and shape. We already see the seeds
of this with the formation of the Nasdaq-LIFFE exchange, the creation
of the OneChicago, LLC joint venture of the CBOE, CME and CBOT and
the interest expressed by Electronic Communication Networks ("ECNs")
in trading SSF.
The futures and securities industries are coming together in
embracing this innovative new product in ways we have never seen them
interact and compete before. Self Regulatory Organizations are
even feeling the competitive pressures and are reconfiguring and
restructuring to sell their regulatory services to the new exchanges
offering markets in SSF and other products.
That the CME, CBOE and CBOT could come together and agree to form a
joint venture to trade SSF, putting aside their competitive spirits
and acrimonious histories, speaks volumes about the transcendental
nature of this new product.
The annual Futures Industry Association Expo starting Wednesday
November 28, 2001, held this year at the Hyatt Regency Chicago, might
be one of the most important trade shows the industry has ever held.
Whether broker, trader, exchange or vendor, the FIA show will offer
opportunities for face-to-face interactions with the leading players
in the SSF. There are tremendous opportunities to be explored and
contacts to be made. The need to learn about this new product is
great because of the potential incredible change it could spawn.
(FYI - I have a limited number of passes to the FIA Expo hall to give
away, courtesy of Trading Technologies and American Express, to the
first people who request them. If I run out, I am sure I can get
more.)
There were 830+ U.S. futures and futures options contracts approved
by the CFTC for trading as of September 30, 2000. The Nasdaq stock
market lists nearly 4700 companies. And that is just the Nasdaq.
The NYSE listed over 2800 companies at the end of 2000. While only
the most well-known, highly capitalized and most active companies
will initially have SSF contracts listed on their shares, the sheer
number of stocks listed for SSF trading could easily dwarf the
existing listed futures contracts. And many of those 830+ futures
contracts are inactive, duplicates or derivatives themselves of other
futures contracts. One can see the potential just in the numbers.
While some have argued in the past that futures on securities would
lead to a reduction in trade in the underlying shares, shifting the
volume from the stock exchanges to the futures exchanges, history
would indicate otherwise. The introduction of options on shares did
not see a reduction in share volumes traded; rather options have led
to explosive exponential growth in share volumes. The introduction
of index futures has also increased share volumes. In fact, about 25
percent of the weekly volume on the New York Stock Exchange is
generated by program trading related to the index futures and option
contracts. Liquidity and overall share volume has only gone up at
the stock exchanges after the launch of these derivative products.
The introduction of SSF will give traders a third derivative class,
after options and indices, which offer new capital and trading
efficiencies. The value of these efficiencies should not be
underestimated. I believe traders will find value in the operational
and capital efficiencies offered by SSF and integrate them into their
existing trading. They will appreciate the more level playing field
and market transparency offered by the electronically traded versions
of SSF. Already the futures industry has seen 800% growth in
electronically traded contracts over the last five years, according
to the NFAs annual review. SSF should only build on this increased
ease of use and experience with electronic trading.
A major difference between trading shares and SSF is the lack of an
up-tick rule on SSF. A trader does not need an up-tick to sell a
futures contract short, whether on shares or any other product. A
trader can merely sell at the best available bid. Another key
related component of this is that the SSF trader does not need to
borrow shares to sell short. The short SSF trader has agreed to
produce the necessary shares at delivery, assuming the trader does
not cover the short and thus offset the obligation before then.
Thus, the complicated borrowed share record keeping requirements for
brokerage firms are eliminated when a trader chooses to short a SSF
rather than the actual shares. The number of potential shorts is not
limited to the financial dynamics or physical limitations of
borrowing shares, but rather just by any potential regulatory
position limits.
SSF are capital efficient too as margins on SSF are lower than
margins on shares, giving traders more money to use on other
opportunities.
There are advantages to trading SSF over options. SSF do not expose
traders to the same volatility and time decay risks as options.
However, SSF expire at the same time as options and offer the options
trader the perfect hedging instrument.
SSF open the door to tremendous opportunity for those well schooled
in hedging and spreading. Because of the capital and cost
efficiencies of SSF, new opportunities in hedging and spreading are
possible and now more affordable. At the same time there are
possible tax savings from trading SSF rather than reconfiguring one's
portfolio of share holdings.
The Nasdaq-LIFFE ("NQLX") exchange offers the SSF trader the most
advanced version of electronic trading and exchange evolution of any
of the SSF exchange contenders. Its first in first out matching
algorithm gives every trader the opportunity to be a part of trades
large and small based on time and price priority. There are no
designated market makers with information, speed or priority
advantages. Every participating trader is a market maker operating
on as level of a playing field as can be found, with each potentially
having access to the whole order book. LIFFE Connect is marketed as
the most advanced electronic trading platform around, and surely can
support that claim if based on functionality offered and volume
traded. NQLX is unencumbered with legacy membership and physical
location market structures. It has an experienced and enthusiastic
staff with a can do and will do spirit. The one cloud over NQLX is
the effect new ownership of LIFFE could have on the Nasdaq-LIFFE
partnership, with Euronext outbidding the London Stock Exchange to
buy LIFFE.
The OneChicago, LLC joint venture, slow to get started, is an unknown
quantity in many ways. It may trade its contracts on Globex2 or CBOE
Direct, or both. It is not known yet. There may be Designated
Primary Market Makers with some sort of market advantage, or maybe
not. Its corporate decision-making is still affected somewhatby the
legacy of membership run physical location exchanges still employing
open outcry trading, though that is changing. While its corporate
leadership is impressive (former CFTC chairman Bill Rainer at the
helm), the OneChicago Exchange has not truly formed its own corporate
identity or filled key positions. Despite its slow start, OneChicago
holds much promise because of the strength of the entities behind it
and the synergies of their combined businesses. The CBOE with its
leading option and index business, the CME with its strong electronic
trading and customer rich equity index markets and the CBOT with its
deep liquidity pool and its rich history of innovation create a
formidable combination.
The American Stock Exchange has also announced it intends to trade
SSF, though not surprisingly not much has been heard from them on
this subject after the tragedy of September 11.
There has also been interest expressed in trading SSF by ECNs, with
Island's named being mentioned at the last NFA Board of Directors
meeting. Two years ago I had heard of interest from the ECN Nextrade
in SSF and becoming a futures exchange. Should one ECN blaze a trail
and become a notice registered futures exchange for trading SSF, it
would not be surprising to see the balance of the ECNs follow.
The single point of execution futures markets of the past and present
will give way to multiple points of execution for SSF. This will
lead to a new type of competition between the exchanges and encourage
increased fungibility of SSF in the future. I expect SSF exchanges
to adopt option market like fungibility eventually, if not sooner.
Ultimately, physically delivered SSF are fungible as the ultimate
result is the longs are delivered shares in the underlying company,
same if they would have bought the shares on cash market.
SSF represent a commodity that the trading public is not afraid to
take delivery of, taming one of the most common misconceptions and
fears of our futures product. Fears of our swimming pools becoming
full of delivered corn or our garages full of train cars of hogs are
eliminated with the simple understanding that all you get when you
take delivery of a SSF contract is shares in the underlying company.
These Shares are easily disposed of with a traditional broker-dealer
account should the need arise. They are also easily redelivered
after selling a futures contract short and offering up the shares at
expiration. Shares will also be able to be exchanged in Exchange For
Physical transactions, giving futures traders another manner of
fungibility for the SSF contracts.
As the public becomes more familiar with SSF and they find a home in
investors and traders financial toolbox, this retail interest could
well extend to other more traditional futures contracts and
innovative new ones. A much greater audience will be available to
provide liquidity to the futures markets, leading to potential
unprecedented growth in futures trading volumes.
The growth in futures trading will not come from more institutions
trading futures, but rather through more individual traders becoming
aware of the advantages of futures trading and having the instruments
and markets offered to meet their needs. Industry studies have
indicated there are some 27 million stock accounts, 5 million option
accounts and 750,000 futures accounts. The futures industry is
dwarfed in many ways by the better-known equities and option markets.
With the introduction of SSF, a myriad of new products are available
to trade for the futures trader. These are not obscure financial
derivative products only truly understood by sharp-eyed traders and
exchange PhD's. Rather, these new products are derivatives of the
shares of some of the most well know companies in the world, with
liquid secondary markets for their shares and options on their
shares. SSF exchanges known so far have all said they will share the
same clearing entity as the option markets, the Options Clearing
Corporation, offering a sound known entity guaranteeing the contracts.
The convergence of the futures and securities industry around this
new product offers great risks and challenges, but also great
opportunity. There will be new entrants in both the exchange and
brokerage communities, leveraging there other related interests in
offering these products. With margins already squeezed in the
brokerage industry, firms must find ways to add value to the investor
experience as never before. Investor education has never been more
important. But that must start with the education of the
professionals in the futures and securities industry.
I hope reading my newsletter offers one small way to start to learn
about SSF. Attending the FIA Expo this week would be an important
way. It should be a very interesting trade show. Attend if you can.
Regards,
John J. Lothian
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