Modest Beginning for Single Stock Futures

November 8, 2002 ( - Trading in single-stock futures, the long-banned investment used to manage the risk of owning stocks, began trading on Friday with modest activity.

After 90 minutes of trading, a total of about 1,000 futures contracts had changed hands on the OneChicago exchange. Most heavily traded were those on Bank of America Corp. and Microsoft Corp., according to a Reuters report.

The two electronic exchanges where the contracts are traded — OneChicago LLC and Nasdaq Liffe Markets LLC — had said they expected a modest start as investors got acquainted with the products, Reuters said.

One Chicago offered 21 stocks at its launch, while Nasdaq Liffe Markets offered 10 stocks and four exchange-traded funds. Both exchanges plan to add more issues in coming weeks.

Single-stock futures trade in much the same way as futures on commodities, fixed-income products or stock indexes. They are contracts that allow investors to buy or sell 100 shares of an individual company at a certain price on a set future date.

Both exchanges have first targeted professionals such as commodity trading advisers, hedge funds and market makers who can use the futures as a cut-rate way to invest in individual stocks and protect their stock portfolios from down markets, according to the Reuters report.

Since 1982, individuals and institutions have been able to hedge their stock portfolios by using futures on major stock indexes such as the Standard & Poor’s 500 and the Nasdaq 100. But futures on individual stocks were banned at that time after US regulators could not agree who would oversee them, Reuters said. Congress pulled the ban two years ago.

Trading First Put off by 9/11 Volatility

According to Reuters, the Congressional move was designed to make US exchanges more competitive with overseas markets that have traded single-stock futures for several years.

But trade was initially delayed by glitches in working out the rules and the volatile markets resulting from the September 11 attacks.

One advantage of single-stock futures is that investors need to put up only 20% percent of the cash value of the futures contract, compared with the 50% percent margin requirement for trading stocks, Reuters said.

Nasdaq Liffe will use LIFFE’s electronic platform LIFFE CONNECT and will rely on having more than one market maker for each contract to guarantee competitive pricing.

OneChicago will trade orders electronically on the CBOEdirect match engine and enter them by using CBOEdirect and CME’s Globex systems. They will initially enlist 16 leading market makers to ensure two-sided liquid markets, Reuters said.