Single stock futures

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A single stock futures (SSF) contract (or security futures contract) is a contract to buy or sell a single security or a narrow-based security index. The standard contract size is 100 shares of underlying stock. Unlike traditional futures contracts, single stock futures are taxed as a security, and the margins (or performance bonds) are higher than most futures.

Contents

Non-U.S. Trading in SSFs

The U.S., compared with non-U.S. exchanges, was later to the table on the introduction of single stock futures. Non-U.S. exchanges have been much more successful in attracting business to these products than exchanges in the U.S.

Today, the most active trading volume for single stock futures is outside of the U.S. In 2007, Liffe, a unit of NYSE Euronext, set a record volume of 75 million Universal Stock Futures contracts traded, up 155 percent on 2006. This ensured that Liffe ended 2007 as Europe’s leader for single stock futures.[1]

The National Stock Exchange of India and JSE Limited, operator of the Johannesburg Stock Exchange, and the MEFF in Spain, also have large single stock futures complexes. In October 2007, Singapore Exchange Limited announced it would introduce single stock derivatives (SSDs) in the first quarter of 2008, the first margin-based exchange-traded product in Singapore.

SSFs in U.S.

OneChicago, established in April 2001, currently is the only U.S. exchange to offer single stock futures. In 2000, Nasdaq-LIFFE Markets (NQLX) became the first U.S. exchange created to trade single stock futures, but closed after several years of operation due to lack of support from Nasdaq. Several other U.S. exchanges and ECNs had suggested that they would begin offering single stock futures, but never completed plans to do so.

In the U.S., the product is subject to the joint jurisdiction of the Commodity Futures Trading Commission (CFTC) and the Securities and Exchange Commission (SEC), unlike futures on broad-based indexes that are regulated only by the CFTC. Single stock futures can be traded out of either a securities or a futures account.

Why SSFs Were Created in the U.S.

Futures exchanges, which began offering trading in highly successful stock index futures in the early 1980s, had in the late 1990s introduced smaller "E-mini" or "mini-sized" versions of larger index contracts, many of which were traded electronically alongside pit-traded index products. Clearly, there was a rush to market for new flavors of “broad-based” stock indexes. Futures exchanges were successful as the indexes began to gain prominence in institutional and retail circles and also because of the tax advantages of futures over securities.

The online trading revolution brought tremendous growth in the securities markets with the advent of attractive IPOs, and trading not only in the blue-chips but also in the tech stocks were particularly successful in the late 1990s. By 2000, the stock market bubble had burst, and securities and futures exchanges actively began to compete for customers by creating new products that mirrored each others' products. Single-stock futures (or "security futures" as they were known early on) were the next step in that metamorphosis.

Prior to the enactment of the Commodity Futures Modernization Act of 2000 (CFMA), exchanges were prohibited from offering futures on individual securities. The CFMA opened the door to trading in 2002.

Challenges

Several major stumbling blocks for single stock futures emerged as security and security options exchanges recognized the benefits that single stock futures might have over their existing products: a more preferential tax treatment, the perception of less stringent regulation, and potentially lower margins for the new product. A margin that was too "futures-like" in its lower-than-stock level, was thought by security options traders to be competitive to security options. Thus, an effort was made by CBOE, in particular, to convince regulators to make single-stock futures margins higher than the traditional exchange-established futures margin, which normally varies between three - 15 percent based on market volatility.[2] They were successful, as single stock futures margins are now 20 percent of the underlying value of the futures contract.

Partnerships

In March 2006, online trading company Interactive Brokers Group LLC purchased a 40-percent stake in the company, and OneChicago focused on educating consumers to see single-stock futures as more than risk management. OneChicago CEO David Downey, who assumed the post in January 2007, said OneChicago has encountered resistance from major banks who could bring their clients to the exchange. “The reason why single-stock futures have not taken off is because it directly competes with the profit centers of some of the most powerful people in America,” Downey said. From the beginning, he said that “the securities side of the world really saw this thing as a threat".

Downey said retail trading firms do not educate their customers about the benefits of single-stock futures for fear of losing commissions, but that he is not bothered. He provided few details, except that the exchange plans to launch a redesigned website that will include an attractive tool allowing potential investors to compare the cost of buying a stock with the cost of buying the equivalent single-stock futures.

Downey also said that OneChicago products are not just hedging tools like a futures contract, but also a financing tool, like a security. Specifically, single-stock futures are a way to invest in securities at a lower interest rate than those that many retail investment banks offer. If investors want to borrow on margin, the interest rate is built into the price of a single-stock futures contract, so they end up paying a lower rate. While major investment brokerage firms charge up to 10-percent interest on margin loans, investors in single-stock futures pay closer to six percent.[3]

JLN Managed Futures Video: OneChicago's Mark Esposito

Mark Esposito of OneChicago Discusses Their NoDivRisk (“1D”) Single Stock Futures
Mark Esposito, a 25-year trading veteran on the floor of the Chicago Board Options Exchange (CBOE), is the managing director, business development at OneChicago. John Lothian News Editor-at-Large Doug Ashburn spoke with Esposito about OneChicago’s NoDivRisk (“1D”) Single Stock Futures products and how commodity trading advisors and managed futures funds can use them.Watch at JohnLothianNews.com[4]

John Lothian News Interview:Tom Regazzi

Single Minded: Tom Regazzi of UBS Finds a Niche with Single Stock Futures Interview
Single stock futures in the United States were launched in 2001, but are often forgotten since their big splash introduction twelve years ago on two exchanges. Quietly, however, single stock futures have been growing nicely at OneChicago, the sole marketplace for the instrument. Through the first nine months of 2013, its volumes are up 49 percent, with 6.96 million contracts traded, topping total volumes posted in all of 2012.

This market has also caught the eye of UBS and Tom Regazzi, managing director at the firm’s Global Synthetic Equity department. He spoke with JLN editor-in-chief Jim Kharouf about how UBS uses single stock futures and the potential for the product going forward. [5]


References

  1. Liffe Expands BClear Stock Range Further. Liffe.
  2. "Get Ready for Single-Stock Futures". Nina Mehta, Derivatives Strategy.
  3. "Who’s Afraid of Single-Stock Futures?". www.medill.northwestern.edu.
  4. Mark Esposito of OneChicago Discusses Their NoDivRisk (“1D”) Single Stock Futures. John Lothian News.
  5. Single Minded: Tom Regazzi of UBS Finds a Niche with Single Stock Futures Interview. John Lothian News.

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