interactive.wsj.com
October 30, 2000
The Future Gets Brighter
For 'Single-Stock Futures'
By KAREN TALLEY
Dow Jones Newswires
NEW YORK -- Does the stock market need "single-stock futures" at this
point?
Some big investors and legislators say yes. But Wall Street, including the
New York Stock Exchange, is up in arms about such products -- futures
contracts on individual stocks.
Like them or not, the futures have nonetheless taken a step closer to being
reintroduced in the U.S. stock market, now that the House has
overwhelmingly passed a bill that would lift the ban that has been in place
since 1982.
The proposal before Congress, part of a larger bill that reauthorizes the
Commodity Futures Trading Commission, could give gutsy market players a
whole new game to play. And it could radically change how investors
engage in short-selling -- betting against stocks.
"This has the potential to replace short-selling," said Owen Lamont, associate
professor of finance at the University of Chicago's School of Business. "It's
structured in a way that invites more convenience."
Unlike conventional stock-trading rules that restrict short sales when a stock
is already falling, there are no short-selling restrictions on futures contracts.
Should the bill pass the Senate, a short seller could theoretically be able to
bet against a stock whenever he wanted by buying "put" contracts on the
single-stock futures. (Put options give their owner the right to sell a security
at a set price; "call" contracts confer the right to buy.)
That appeals to Manuel Asensio, a well-known short seller who's ready to
buy into the pending legislation.
Mr. Asensio calls the proposal "a wonderful opportunity." It could prove a
cheaper alternative to short-selling -- which is done by borrowing shares and
eventually repurchasing them to return to the lender -- and "end the
discrimination between someone who wants to take a long position and
someone who wants to short-sell," he said.
David Rocker, another short seller and head of Rocker Partners, would
welcome a change. "A modification of the short-selling rule is long overdue,"
he said.
The prospect of trading stock futures also appeals to some investors who
don't, as a practice, engage in much short-selling. "This could create more
liquidity for the market," said Greg Kuhn, principal of Kuhn Asset
Management. Mr. Kuhn said he would use the change as "another tool to
hedge, to hold, to limit losses."
Currently, investors who buy stocks on margin must put up 50% of the
stock's price. In the futures market, margins are currently only 5% of the
contract's price. However, the version of the bill that the House passed puts
margins for single-stock futures at about 50%, the same as for stocks,
according to the Chicago Board Options Exchange.
Some observers on Wall Street feel that single-stock futures could cause
increased stock-market volatility. In a letter to the House Commerce
Committee, Richard Grasso, chairman of the New York Stock Exchange,
called the measure "a significant step backward in competitive parity," and
said he will not support it.
Some observers say the NYSE and the National Association of Securities
Dealers, which runs the Nasdaq Stock Market, feel the measure would set
up too much competition to traditional stock trading. Spokespeople at these
markets declined to comment on the measure.
Not every investor, not even every short seller, is a fan of the plan. "This
[single-stock futures] could increase leverage, and that's the last thing the
market needs," said Bill Fleckenstein, partner with short seller Fleckenstein
Capital Management in Seattle.
To be sure, trading single-stock futures is not a done deal. The measure
must still go before the Senate, and even its supporters say it may not make
it there before the end of this congressional session.
Even if the proposed futures bill does not pass, there could still be some
positive news on the way for short sellers. The Securities and Exchange
Commission is considering a measure that would do away with the "uptick"
rule, the rule that slows down short-selling when a stock is already falling.
Staff at the SEC are preparing a proposal that could go before
commissioners for review by early next year.
The NYSE and the NASD are against doing away with the rule, saying that
doing so could pummel individual stocks and accelerate market slides.
"It is an important factor in market confidence to assure investors that short
sellers cannot take the market down an unlimited amount," said NASD
President Richard Ketchum in a letter to the SEC.
Write to Karen Talley at karen.talley@dowjones.com
KJC |
