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The real problem in the S & P isn't the relative assumed illiquidity
real or not. The problem is the price discovery....the primary market
function is slipping away....moving back to the cash. This is a bigger
concern for the derv communtiy than a % slippage issue. If the
liquidity for 10 lot SPU institutional user beomes better in the
basket/efp market than the whole purpose of a future's market for
nonspeculators disappears. We can make all kinds of excuses and create
all kinds of cause/effect explanations but the symptons of a dying
market are present.
Remember the S & P future has competition.......upstairs traders trading
against a basket.....options against the basket(rignt now most of the
hedging is against the future..but that is changing)...you get enough
slippage and even the spyder becomes a viable alternative(this is a long
way from happening not because of slippage..the spyder is 100,000 up
but the b/a is still worse than SPU slippage.......offshore
competition?. You have an exchange in London that is kicking but in a
good number of products...they murdered the Germans in their Bund
contract while they slept thru change. You have the lads at the CBOT
that begin trade a Dow contract on 10/06....all they have to do is add a
Jumbo size contract and voila!. They thrive on exchange competition
back home in Chicago. For years the Merc was viewed as having the CBOT
on the ropes....guess what the view is now?
The way to make money in all this is to get the banner business in
Chicago. About every two to three years the exchanges go into
promotional battles....this could potentially be the most interesting
time in deriv history.
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