Single Stock Futures May Cannibalize Stock Loan Biz
Sarah Gordon
Wall Street firms are concerned that trading in single stock futures may cut into the securities lending business. The long awaited futures products are expected to begin trading in September or October. Although volume is expected to be low initially, some suggest that if single stock futures gain popularity they could replace stock loans as a vehicle for those who want to take a short position. "The net effect will be to cannibalize the stock lending business. One of the principal reasons for lending stock is to allow people to take a short position. If single stock futures will allow you to take short positions without stock lending, that may make it the cheaper option," predicted Jean-Paul Carbonnier, an analyst at The Tower Group and author of a report on single stock futures.
While the majority of those interviewed for this story concurred, the fear is that Wall Street firms have not yet formulated defensive measures to stave off an assault on the lucrative stock lending business. The Securities Lending Division, an independent division of the Securities Industry Association and the de facto trade group of the stock loan business, does not yet have an official position on what single stock futures will mean for the business, said Jan Price, secretary of the SLD and head of securities lending at Prudential Securities. The SLD will hold its next meeting some time in September, at which point single stock futures will be one of the main items on the agenda. However, Price was reluctant to speculate on what single stock futures could mean to his business.
The reason securities firms are holding back could be that too many question marks remain. "The problem is, people know the right questions to ask, but the people you would normally go to for the answers are also asking the same questions," said Scott Jones, director of equity sales and trading at Jefferies & Co. No one yet knows what volumes or the depth of market will look like, and even the demographic of single stock futures users remains uncertain. He added that if Jefferies discovers that single stock futures are cutting into its securities lending business, the firm might shift its emphasis towards lending international securities or government bonds.
There is, however, a dissenting view. Bill Rainer, CEO of OneChicago, believes single stock futures could have a positive effect on the stock loan business. He predicts that specialists will become the new counterparties for stock loans because they will need to avert risk. "Specialists will be good at borrowing at cheap prices. That will lead to a narrowing of spreads and more liquidity." The final outcome could be a more transparent, and therefore more appealing, securities lending business, he concluded. But others dismiss Rainer's optimistic view as pure diplomacy. OneChicago and Nasdaq Liffe Markets will be the first exchanges trading single stock futures, so other stock loan professionals believe it is in Rainer's best interest to suggest that OneChicago's success would not imply securities firms' loss. |
