Kansas City Board of Trade to Test Futures Tied to Internet Shares
Bloomberg News
January 10, 1999, 10:12 a.m. PT
Exchange Asks to Test Futures on Companies Tied to Internet
Washington, Jan. 10 (Bloomberg) -- The Kansas City Board of
Trade is trying to find out whether investor enthusiasm for
Internet-related stocks spills over to futures and options.
If federal regulators give the go-ahead, the exchange will
offer options and the first-ever futures tied to Internet shares,
based on an index of 50 stocks like Amazon.com, which sells books
and compact discs over the Internet, or Lycos Inc., which helps
people navigate cyberspace.
Some mutual fund managers say futures and options will draw
a mix of cautious investors wanting a safer way to invest and
risk-takers trading on short-term price changes. Skeptics say the
futures and options could intensify risk while the people
infatuated with Internet stocks have already decided to invest in
individual companies.
''You create an entirely new market of buyers and sellers,''
said Emmy Sobieski, a portfolio manager and technology specialist
at Nicholas-Applegate Capital Management, a San Diego mutual fund
manager.
Funds that lack the manpower or expertise to buy individual
Internet stocks may use futures and options to find another way
to invest in the sector. ''Then there's this whole separate
market of arbitragers,'' she said.
Soaring Prices
Internet stocks have attracted so many buyers that several
analysts are concerned that prices far exceed earnings potential.
Amazon.com, the largest online bookseller, saw its stock rise
more than tenfold last year, to 107 5/64 from 10 3/64 -- even as
it reported negative earnings. It closed Friday at 160 1/4.
The Kansas City exchange last month asked the Commodity
Futures Trading Commission to approve the new contract, starting
a review process that could take several months.
The contract would be based on an index, known as the Isdex,
published by the company internet.com in Westport, Connecticut.
The index -- which rose 188 percent in 1998 -- contains many well-
known Internet stocks, such as America Online Inc., E*Trade Group
Inc. and Netscape Communications Corp., as well as Amazon and
Lycos.
''The Isdex represents what we consider to be the most broad
spectrum of what the Internet industry is,'' said Steve Harmon,
senior investment analyst with internet.com. ''It's sort of like
the Dow Jones Industrial Average for the information age.''
SEC Hurdle
The CFTC will accept comments on the Kansas City Board of
Trade's proposal until Jan. 25. If the agency approves the
futures and options, they will be reviewed by the Securities and
Exchange Commission.
SEC approval is no small hurdle: The commission last year
rejected a Chicago Board of Trade proposal to trade futures on
the Dow Jones transportation and utility indexes, saying they
contained too few stocks and could be prone to manipulation. The
CBOT filed a lawsuit in a bid to overturn that decision.
''We're anticipating that we'll be able to work with
(regulators) to get it approved,'' Kansas City Board of Trade
spokeswoman Candice Bowman said, noting that Isdex tracks 50
stocks, whereas the transportation and utility indexes only
represented 20 and 15.
The Kansas City board has the advantage of expertise: It
invented stock index futures in February 1982 with futures on the
Value Line Index of about 1,650 stocks, Bowman said.
The Philadelphia Stock Exchange already is a half-step
ahead. Last month, the exchange began trading options on an index
of 20 Internet companies calculated by the online publication
TheStreet.com.
Risk Upon Risk
Trading volume on the exchange's Internet options totaled
9,295 contracts last month, for an average daily volume of 580
contracts, spokeswoman Lynda Caravello of the Philadelphia
exchange said. ''There's been a huge amount of interest in it
from a lot of our customers and our members.''
Still, that trading is dwarfed by long-standing stock index
futures. On the Chicago Mercantile Exchange last month, futures
on the S&P 500 reached a volume of 2,834,713. Futures on the
Nasdaq 100 -- which includes Amazon, Netscape and other Internet
stocks -- reached 107,995 contracts, while options on the Nasdaq
100 futures only totaled 13,421.
Innovations like those offered by the Philadelphia and
Kansas City exchanges could be too risky for many investors, fund
managers said.
''You're piling on even more risk to investing in probably
the riskiest stocks that you can think of buying or selling,''
said Robert Natale, manager of the $300 million S&P Stars fund
for Bear Stearns Asset Management. ''The problem with futures and
options is you have to be right twice. Not only do you have to
divine the proper direction but you also have a time
limitation.''
The bulk of investors will probably stick to picking the
specific stocks they think will perform well long-term.
''We try to add value through individual stock selection
rather than using an index as a proxy,'' said Ryan Jacob,
portfolio manager for the Internet Fund, which has about $30
million in assets. ''For other investors who wish to bet for or
against the sector as a whole (futures) can provide a tool...
There seems to be not a lot of neutral ground in this sector.
Either you're for or against it.'' |
