US to put single stock futures to the test
By Arkady Ostrovsky
Financial Times; Sep 10, 2002
After months of hype, the potential for the market in single stock futures is about to be tested by US investors.
OneChicago, a US electronic derivatives exchange that is owned by Chicago's three exchanges, is planning to list the first 100 single stock futures by the end of October, according to Robert Paul, general counsel to OneChicago.
Nasdaq Liffe Markets (NQLX) is also expected to make an announcement about its start date soon.
Both have approval from the US Securities and Exchange Commission to trade single stock futures after a 20-year ban on the product in the US.
The listing of single stock futures in the US will be a crucial test for the success or failure of this derivative instruments.
"Single stock futures need to take off in the US, otherwise they will remain a niche," said Paul Meier, chairman of the Swiss Futures and Options Association.
Single stock futures were one of the most hotly debated subjects at this year's Burgenstock derivatives conference in Switzerland. At stake is the reputation of two leading European derivatives exchanges.
Euronext.liffe and Eurex have opposing views about the potential of single stock futures.
Euronext.liffe, which introduced single stock futures in January last year, hailed it as a revolution in equity derivatives. John Foyle, deputy chief executive of Euronext.liffe said: "Universal stock futures are cheaper to deal in and to settle than underlying stocks."
It is also cheaper to keep an open position in single stock futures as it only requires an investor to put 10 to 15 per cent of the underlying stock value.
Yet despite these advantages, volumes have been relatively low. Average trading volumes on Euronext.liffe in single stock futures are 20,000 contracts per day whereas volumes of trading in Euribor futures contracts, short-term interest rates futures, are about 400,000 contracts a day.
Euronext.liffe blames the relatively low volumes on the lack of participation from the US market.
Hugh Freedberg, chief executive of Liffe said: "The development of the market in Europe has been held back by the fact that US [derivative exchanges] were not trading single stock futures."
Eurex, joinly owned by Deutsche Býrse and SWX Swiss Exchange, argues that this is because there is no real demand for the single stock futures in the market. Rudolf Ferscha, chief executive of Eurex, says that unlike futures on stock indices on exchange traded funds, single stock futures add no value. "We would have listened to the demand, if it was there."
OneChicago positions itself between Eurex and
Euronext.liffe. Bernard Dan, executive vice-president of the Chicago Board of Trade, one of the parent companies of OneChicago, recognises the importance of single stock futures but does not expect a quick take-off. He sees potential growth in futures based on several stocks representing one sector rather than just single stock futures.
Although single stock futures respond to volatility rather than share price, many investors shun new products altogether when confidence is low and risk aversion is high. Even Euronext.liffe acknowledges this.
"Single stock futures were designed during the boom market, but were introduced in the bear market, which is a difficult time to launch a new product," says Mr Foyle.
If trading in the US takes off, Euronext.liffe will be vindicated and Eurex may face questions from its clients and shareholders. If US market participants show little interest in the new instruments, the opposite will be the case. |
