Firm Sets An Early Price For Trading Single-Stk Futures
WSJ
By KOPIN TAN
Of DOW JONES NEWSWIRES
NEW YORK -- Thomas Peterffy can hardly be accused of being behind the curve.
The chairman of Interactive Brokers Group steered his Greenwich, Conn., firm toward electronic options trading in the 1980s, long before technology was in vogue and Bill Gates was a household name.
Now, as U.S. regulators finalize rules that will allow single-stock futures to begin trading, the electronic brokerage firm has fired a first salvo: Interactive Brokers indicated this week it will charge retail customers a flat rate of $1 a contract to trade single-stock futures, which are futures tied to individual stocks and which are available in Europe but which haven't been traded in the U.S. for nearly two decades.
"$1 per contract may sound like an unusually good deal," Peterffy said. "It is our goal to continue to provide the fastest and best execution for our customers' orders at the lowest cost in the industry."
The move gives an early indication of the kind of commission rates and costs individual investors might expect from electronic direct-access brokers when single-stock futures begin trading, expected later this quarter (although that start date has been postponed several times before).
Interactive Brokers said its $1 rate is expected to cover exchange-related and clearing costs, even though the exchanges themselves have yet to finalize these. Right now, U.S. authorities are putting the finishing touches on regulations governing single-stock futures, such as margin requirements and tax issues. Exchanges that will trade single-stock futures - including OneChicago, the Nasdaq Liffe Markets and Island ECN - haven't said definitively what exchange-related fees they will levy, although people familiar with the matter estimate it might range between 25 cents and 40 cents a contract.
At this stage, many brokerage companies say they haven't finalized their commission rates for single-stock futures.
Peregrine Financial Group, a Chicago-based futures commission merchant that runs "Best Direct," an online futures platform, said it expects to charge rates very similar to popular electronically-traded index futures contracts. These could range between $8 and $18 a contract - depending on factors such as volume - and will include exchange-related costs, said Russ Wasendorf, Jr., Peregrine's chief operating officer. Retail commission rates could be higher, although they would still likely be lower than the cost for trading options.
Not surprisingly, that could prompt inevitable pricing comparisons with options. For instance, Interactive Brokers currently charges retail customers $1.95 a contract to trade options, nearly twice its rate for single-stock futures.
Comparing Costs Between Options, Single-Stock Futures
But people from both sides of the options and futures divide say that comparison is unfair, since the two are essentially different: options give investors the right - but not the obligation - to buy or sell stock at a specific price within a set time; single-stock futures are contracts pegged to a company's shares settled at a predetermined delivery date, either by cash or delivery of stock.
But to average retail investors looking for a derivative to hedge their stock position, single-stock futures' cheaper costs might prove persuasive. If that is the case, it may not be good news for the options industry, which has recently seen volatility and trading volume slump.
With stocks, options and single-stock futures, Interactive Brokers is able to minimize its transaction costs essentially because its electronic automated platform cuts down the handling and processing involved, and because it pools customer orders to maximize volume and efficient execution.
But the commission rate for single-stock futures is substantially lower than that for options for various reasons. "It is easier - faster, less error prone, less subject to recall or adjustment - to execute a single-stock future than an option because all the proposed single-stock futures exchanges are purely electronic and provide members with lock-in trades," Peterffy said. "Four of five options exchanges are open-outcry, (and) they all have numerous restrictions about what orders are eligible and how the trades are supposed to be represented."
Still, industry watchers say they don't believe the advent of single-stock futures will hurt the options industry, chiefly because of the inherent differences. "Option prices represent probabilities associated with various price outcomes, while futures only indicate the direction of expected price moves," Peterffy said.
As such, option pricing is far more complex, featuring an array of strike prices and factoring in constantly shifting risks and premiums, all of which justify the higher transaction costs, option traders say.
"Every time we've seen a significant index future come along, not only did it not take away from the cash markets (including the options market), it in fact gives market makers a better opportunity to offset their costs and risks," Wasendorf added. "If single-stock futures take off, it's going to create and add more volume to options trading."
-By Kopin Tan, Dow Jones Newswires; 201-938-2202; kopin.tan@dowjones.com |
