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In this commentary, NEO's Jos Schmidt discusses regulatory requirements and needs in the Canadian equity markets.

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February 1, 2002

Next Revolution: On Wall StreetTraders Prepare for Single Stock Futures

By Tom Taulli

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  • Next Revolution: On Wall StreetTraders Prepare for Single Stock Futures

Market makers and special ists may soon have a new crystal ball to catch the market's direction in the wee hours.

Once single stock futures (SSFs) start trading in the U.S., say Wall Street pros, traders may look at their performance in the early morning, pre-opening for the kind of market indicators now found in stock index futures.

Trading in U.S. single stock futures is set to begin soon, following enactment by Congress last year of the Commodity Futures Modernization Act. Facing industry complaints, Congress ended an 18-year ban on single stock futures trading.

"There's a possibility that single stock futures will wind up being a proxy for pre-open trading in the primary market," said Michael LaBranche, who heads an NYSE specialist, LaBranche & Co., a firm that expressed interest in trading SSFs. "These can be a way to absorb a lot of volume for event news, such as a merger."

A futures contract is an obligation to make or take delivery of an underlying asset at a time and in a manner specified in the contract by the exchange. Whether or not the SSF business lives up to the hype generated by some industry officials, single stock futures have spawned the birth of new exchanges. They have also raised the hopes of dealers who expect a potentially lucrative franchise.

The American Stock Exchange, Nasdaq/LIFFE Markets and OneChicago (a joint venture of the Chicago Board of Trade, the Chicago Mercantile Exchange and the Chicago Board of Options Exchange) are pumped up for the new instruments.

The brokerage industry was "screaming for single stock futures," said former SEC attorney Mark Borelli, now in private practice in Chicago.

Single stock futures, popular on some overseas exchanges, are expected to find a following among broker dealers, proprietary traders, market makers, banks, hedge funds and other investors.

Pros say they have many attractions: no uptick rule for short sellers, which means an ability to short the futures contract of the underlying stock without having to borrow the stock. (Short squeezes are not an issue.)

Single stock futures are said to cost less than trades in the underlying market. Experts say they will reduce net volatility in these underlying markets.

"Look at the early second quarter, say April, for the launch of trading," said Howard Simons, senior vice president of product research at Nasdaq/LIFFE, a joint venture between Nasdaq and the London International Futures and Options Exchange. "The uncertainty is due to operational and regulatory uncertainties, particularly in regard to margin issues," Simons added.

Launch Details

At first, the Nasdaq/LIFFE launch is expected to consist of 10 Nasdaq, 20 listed and other contracts. There are also plans to offer Nasdaq/LIFFE indices. Nasdaq/LIFFE will tap the customers of LIFFE futures and options traders. It will use the electronic LIFFE Connect system and clear through the Options Clearing Corporation (OCC).

Like the Nasdaq/LIFFE, OneChicago will capitalize on its large customer base. Orders will be handled electronically and entered into the CBOEdirect and GLOBGEX2 electronic trading systems. As Traders Magazine went to press, OCC was negotiating to clear all CBOE transactions.