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Stipulating that I know little about the futures industry or the more
nuanced mechanics of something like this. John, I'm not trying to be harsh
here. I just honestly think this is a really, really bad idea. Swaps and
spreads have obvious benefits for anyone who trades the underlying. This
contract has no obvious customers except one.
John said:
The other concern I have is with the basic idea that these contracts can be
constructed by these traders to go up a large percentage of the time. The
figure 90% has been used in closed door gatherings of CBOT members, where I
was present. This claim was never adequately supported to my satisfaction.
Correctly, the CBOT preliminary material promotional material I have seen
does not include this or any similar claims.
Kent says:
Up 90% of the time? Really? I don't have to know much about the industry
to know that this would be a nice trick if it were possible. But let's say
that it is. Let's say that on average, one of these Xcontracts will end
it's life up an average of $750 from where it starts. Everyone knows what
will happen next. That gets arbed away on the open of the contract. From
there on, it's a craps shoot. So now let's say I'm a "member of the
public". What's my angle? If I think corn is going up, do I want to
complicate a position and dilute my margin with S&P, oil, and lumber? Nope.
And the argument about being able to neutralize portions of the position
using the underlying? If I wanted to get into pork bellies and gold
positions, why would I complicate my analysis with copper and 2-year notes?
Jesus, getting one market right is tough enough.
John said:
The Xfunds also present the opportunity for the CBOT to trade Xfunds based
on
the futures contracts of some of the other exchanges. We could add a long
crude oil or a short sugar to the mix, or maybe even a long single stock
future contract to an Xfund. This offers tremendous opportunities for the
CBOT and its traders and could benefit the other exchanges as well by the
increased order flow associated with the hedging arbitrage.
Kent says:
Now we're getting to the point. This allows the CBOT to trade other
exchange's stuff and "offers tremendous opportunities" for the CBOT pit
traders.
John said:
I am a proponent of offering new contracts on
both the floor and a/c/e, like the CBOT did on the new 10-Year Swap
contract.
That one, BTW, is trading almost exclusively in the pit. I think the
reason
they want to put it on the floor is to help compensate the floor traders for
the trade that has moved off the floor. The exchanges are all about fair
and
open markets, but they are also about member opportunity. The Xfund is an
attempt to create a new product that takes advantage of the floor traders
ability to use their cheap commissions to create liquidity in this new
product by arbitrage
Kent says:
Isn't this the real kernel of inspiration behind the new contract? Benefit
the floor traders? An attempt to create a product that is easy for floor
traders to arb? Then the only people who will want to trade it will be
floor traders who benefit. Shouldn't the CBOT be creating products that
everyone wants to trade?
Here's some ideas. An Anthrax contract: that way, if you think you're gonna
get Anthrax, you could short one of these puppies and you'd be safe. A Spam
contract: got too much Spam in your inbox? Short one of these and hope the
guy on the other end takes delivery. An A/C/E Volume contract: if you're a
floor trader, you could go long one of these and you'd benefit as the rest
of the world goes electronic.
This contract reminds me of that episode of 60 Minutes where they did a
segment on the derivatives industry shortly after Barrings and Orange County
went down. They held up a flash card filled with symbols that defined some
derivatives contract. It looked confusing as crap to me and I know PERL.
Rule 1 of customer service: service the customer. Unfortunately, this is
open to interpretation.
Kent
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