Individual Stock Futures - The Fuel For Other Markets?
Exchanges that handled a record $594 trillion of futures, options and swaps last year say they expect trading growth to come from US investors who soon will be able to buy futures on individual stocks.
From Chicago to Sydney , trading of contracts linked to bonds, equities, interest rates and other securities or commodities rose 78 percent last year from 2000. Institutional investors who dominate the market used the contracts to hedge financial risk as the US cut interest rates 11 times and after terrorist attacks sent markets reeling.
Contracts linked to shares of companies such as General Electric Co. would be cheaper than buying the actual stock. US exchanges expected to offer new contracts this year are targeting individual investors who don't normally trade futures.
Stock futures will enable exchanges ``to tap into a client base they don't have yet, and that's the individual equity trader,'' said Joe Murphy, chief executive officer of New York- based Refco Group Ltd., the largest U.S. futures firm based on trades cleared. ``It broadens their target market.''
Futures on individual stocks have yet to make a dent in Europe during the decade that they have been available. Trading in the US has been slow to start since Congress lifted its ban in 2000, and critics say futures are more expensive and riskier than stock options already in use.
Stock futures ``are not going to be in the same league'' as benchmark contracts linked to Eurodollars or Treasuries, said Richard Berliand, managing director for futures and options at J.P. Morgan Securities Ltd. in London. The new contracts have less than a 20 percent chance of becoming blockbusters, he said.
Proponents of stock futures say the market will get a boost because five U.S. exchanges are now preparing to offer the contracts. Refco's Murphy estimates that more than half Refco's 190,000 customers will trade single-stock futures once they become available in the U.S.
Some investors prefer futures to stock options, which can be complicated to understand and track. Options include more variables, such as the different prices for each based on the future value of a stock and when the option comes due.
Exchange officials, brokers, investors and regulators will examine U.S. plans for single-stock futures as part of the annual Futures Industry Association conference, which begins today in Boca Raton , Florida .
The Chicago Mercantile Exchange, the largest U.S. market for derivative contracts, expects to offer futures on 50 to 75 U.S. stocks as part of a joint venture with the Chicago Board Options Exchange and Chicago Board of Trade. The trio announced a list of 24 market makers for the new securities today.
Nasdaq has a similar venture with the London International Financial Futures and Options Exchange.
Exchanges want to expand their business beyond contracts tied to interest rates, stock indexes, bonds and agricultural commodities that attract mostly institutional investors. They also want to protect their business from online rivals planning to offer stock futures such as Island ECN Inc., an electronic network where one-fifth of all trades for Nasdaq stocks occur.
At stake is a share of a US equity market where more than $12 trillion of stocks are traded each day.
The futures would require an investor to buy or sell a company's stock, or settle in cash, at a specified price and date. Stock options, which some institutional investors are barred by their own rules from buying, carry the right but not the obligation to buy or sell.
Stock futures had been banned in the U.S. because of concern about potential stock manipulation and a dispute over who would regulate them. Congress changed the law in 2000 that resolved regulatory authority and led to some safeguards for investors.
At the London exchange, the largest European market for single-stock futures with 96 contracts for individual stocks, 2.326 million contracts traded last year, or 1.1 percent of overall trading of 215.7 million.
Source: RiskCenter.com |
