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In australia we have had single stock futures for the last few years.The reality is that the market makers charge a fair spread (10 cents)
to trade futures in these stock futures. When the Underlying stock spread is 1 cent
on the big stocks like BHP and the banks.Hence the SSF market is illiquid because its cheaper to get Margin Stock or trade CFDs
(even with their rubbish spread).This illiquidity is only really a phantom because if you bought enough of a Single Stock Future
to upset the Market makers' position limits all he would do is buy the physical stock
and therefore cover himself at the 1 cents spread not the 10 cent Bid Offer spread SSFs have.If per chance the SSF Bid Offer spread moves away from where the Underlying stock is trading
their are enoough Investment Bankers and funds out there who would simply sell the
SSF and buy the stock so that it would come into line.
thats how you can get a normal market in a SSF that only has 85 contracts traded in one day.Regards
David Hunt
Message: 1
Date: Tue, 01 Jul 2003 04:47:21 -0400
From: Dan Goncharoff <TheGonch@xxxxxxxxxxx>
Subject: Re: qqq vs nqlx
John makes several good points, but I would like to add one of my own.
When markets are trading smoothly, it is fine to evaluate liquidity by
the volume of contracts. Markets are not always smooth, however, and a
trader needs to consider how he expects a product to trade in rough
markets. Will market makers still make a reasonable market when the
bottom falls out? If not, will there be practical alternatives that will
allow the trader to eliminate or offset risk?
Frankly, the proof of the pudding is in the eating, and we haven't had a
good bite of bad-market pudding since the introduction of security
futures. Traders should give some thought to how to exit risk through
alternative markets (eg, buying puts or shorting stock to offset a long
position), and watch those markets the same way a driver watches the
traffic behind him in the rear-view mirror.
Regards
DanG
John J. Lothian wrote:
>Earl:
>
>Security futures challenge our understandings of what liquidity is.
>Most contracts are judged by number of contracts traded. However,
>with security futures products like the QQQ ETF, and others, the
>contracts market makers are continually making 2 sided markets. I
>regularly see bids and offers 100 up on security futures at both
>excchanges.
>
>Bill Rainer, former CFTC Chairman and CEO of OneChicago, recently
>said that there has yet to be an order that is too large for
>OneChicago market makers to handle. They have had 2000 and 3000 lot
>orders all trade at the same price. I agree, and the same is true
>for NQLX too.
>
>Security futures markets have the most liquid cash markets available
>of any futures markets. These cash markets are accessible to all,
>but the market makers have multiple avenues to lay off their trades
>in broad based indices, cash stocks, options or other security
>futures products.
>
>Thus, while we might brand low volume for a contract poor because of
>low number of trades, that label does not really reflect the true
>liquidity of those markets.
>
>Regards,
>
>John J. Lothian
>
>Disclosure: Futures trading involves significant risk. Security
>futures are not for everyone.
>
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