NasdaqLIFFE, OneChicago Differ on Fungibility
By Christopher Faille, Reporter
Monday, December 23, 2002
NEW YORK (HedgeWorld.com)—Thomas Ascher, the chief executive of NasdaqLIFFE, one of two exchanges now offering single-stock futures in the U.S. market, said this week that he is ready to give traders what many have said they want, fungibility, i.e. the ability to open a contract on one exchange and close it on the other.
Recently, a study published by Celent Communications LLC, (Previous HedgeWorld Story), indicated that the lack of fungibility could be a serious impediment to wide use of single-stock futures.
Mr. Ascher said that although he is certain officials at OneChicago LLC are aware of his position in favor of fungibility, just as he is aware of their opposition, he hasn’t discussed it directly with them. “We haven’t had a conversation. We’ve agreed to disagree,” he said.
Fungibility and common clearing through the Options Clearing Corporation has been the rule in the stock-options world for decades. It has encountered more resistance in the futures markets generally, though. The difference of opinion between NDLX and OneChicago might be considered a cultural one, with OneChicago bringing to security futures the views of futures exchanges generally, whereas NDLX is, and thinks like, an offshoot of the equity markets.
Christopher Krohn, managing director of strategy and marketing for OneChicago, acknowledged last week that the exchange, a joint venture of the three other Chicago derivatives exchanges, has received requests from traders for fungibility. “From the outset, though, we have said that the best way to build liquidity in a new product is not to have fungibility.” Single-stock futures will have to become fungible at some point, he agreed. “The question is when.” He observed that stock options were not fungible when they were first introduced, although in time they became so.
A Point of Agreement
Neither of the single-stock futures exchanges say they are in direct competition with the stock options markets. “They are different products,” Mr. Ascher said. “There are various trading scenarios. A hedge fund manager might use single-stock futures in lieu of options, but on the whole our arrival on the market will be additive.”
“We believe that the products are complementary,” said Mr. Krohn, on the same point. “The history is that when you introduce a new derivatives product, it provides new opportunities for market participants to hedge their risks and develop new strategies.”
Both exchanges acknowledge that they may well face additional competition, both from Island Futures Exchange LLC, an affiliate of Island ECN Inc., and from the American Stock Exchange LLC. Of the four, Amex may prove to be the only exchange to employ old-fashioned open-outcry floor trading as part of its mix although it, too, of course plans to provide for electronic order entry. There is an advantage to being the first in a market, in institutional experience and the development of brand loyalties, but neither Mr. Krohn nor Ascher thought that would deter the expected entrants.
“To say that there’s never any room for more competition would be an act of denial on my part,” said Mr. Ascher, although he added he thought Island and Amex might both be amenable to fungibility.
Jeffrey P. Burns, the assistant general counsel of Amex, speaking at a conference hosted by the Securities Industry Association last February, said that the Amex would prefer that the security future contracts based on the same underlying security be fungible among markets. “We believe that fungibility will better promote and foster the development of a market for security futures,” he said. |
