Momtchil Pojarliev
Traders Magazine Online News

Some Like It Hedged

BNP Asset Management's Pojarliev discusses a variety of options to address foreign currency exposures. Although there is no single best-practice solution for addressing foreign currency exposures, institutional investors have three main choices, he says.

Traders Poll

Amid changes in builder, do you think the CAT project will be completed by 2020?

Free Site Registration

April 21, 2005

Back to the Stock Futures? Educating the Short Sellers and the Professional Traders

By Mark Longo

Also in this article

  • Back to the Stock Futures? Educating the Short Sellers and the Professional Traders
  • Page 2
  • Page 3

Traders are sometimes counterintuitive. At least that's what officials of an exotic product are hoping. We're speaking of the checkered but short history of single stock futures. Three years ago, after the ban on trading these derivative products was lifted in the United States, single stock futures appeared to crash land from investor neglect. Yet today these hybrids have become popular with some traders, who believe they deserve a second chance. Why? They are convinced because volume is climbing. Volume was up by 20 percent last year - from 1.6 million contracts in 2003 to 1.9 million in 2004. And it is a pace some pros expect to continue in the months ahead. However, volume is still only one percent of the market for futures linked to the S&P stock index. That doesn't exactly qualify single stock futures as a hot product.

Still, OneChicago, the only exchange now trading single stock futures in the U.S., is hopeful. That's despite the inactivity of two other single stock futures entities, Nasdaq Liffe Markets (NQLX) and Instinet Group. NQLX never got off the ground and Instinet has yet to follow through. Their reluctance about single stock futures is understandable. "The main problem with these products is a lack of education," Mark Esposito, a veteran floor trader of the Chicago Board Options Exchange, told Traders Magazine. Esposito is a consultant for OneChicago.

OneChicago is the joint venture of the big three Chicago derivatives exchanges, the CBOE, the Chicago Mercantile Exchange (MERC) and the Chicago Board of Trade (CBOT). At this point some may be asking why this column, a monthly piece about options, is discussing single stock futures. They are neither an option nor a stock. Fair enough.

Single stock futures - how they work and how they came about - are a hybrid that this columnist believes is worth your attention. They finally emerged from the shadows when their regulation was split between the Commodities Futures Trading Commission (CFTC) and the Securities and Exchange Commission.

Mystery Explained

You're probably asking yourself why you haven't heard much about them over the last three years. The answer is that no one has a vested interest in telling you. Under normal circumstances, the task of selling new products falls to the clearing and brokerage firms that handle a trader's accounts. However, these same firms make money charging margin premiums whenever traders need to borrow shares. Therefore, they are unlikely to promote a product that could hurt themselves.

"The major hurdle is that the clearing and brokerage firms do not want to facilitate these products because they take money away from their stock lending business," says Bill Brodsky, Chairman and CEO of the CBOE. Adds Mary Haffenberg, communications director for OneChicago: "It's definitely advantageous to the trader, but it's more difficult to show the advantages for the broker. It's not in their best interest. In addition to losing revenue, brokers are also turned off by the dual regulation. It's a hassle to have to deal with both the CFTC and the SEC."