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Single-stock futures a market for professionals

Updated: May 3, 2013 12:14PM

Originally published: November 19, 2002

An entirely new financial market will be launched Friday, and its epicenter--if not its trading floor--will be in Chicago.

Two electronic exchanges will start trading “single-stock futures.” These new contracts straddle the concept of stocks and options to create a completely new way to either speculate--or hedge against risk--in owning stocks.

These new exchanges will be completely electronic--no trading floors, no pits, no “seats.” And they will be fiercely competitive. The hometown candidate is called OneChicago, and for the first time, Chicago’s major exchanges--the Chicago Board Options Exchange, the Merc and the Board of Trade--have joined forces to compete against the rest of the trading world.

Competitors abound

Their main opponent is the Nasdaq Liffe Markets (NQLX), which combines the resources of the Nasdaq marketplace and the London-based LIFFE, the second-largest derivatives exchange in the world. In coming months, it’s expected that two more, the American Stock Exchange and the electronic Island Futures Exchange, will set up their own markets.

The product, single-stock futures, will be jointly regulated by the Securities and Exchange Commission and the Commodities Futures Trading Commission, which regulates commodity futures. So for the first time, the worlds of futures and securities will intersect with not only products, but regulation, taxation and margin requirements in common.

Initially, each exchange will open trading on about 10 stocks and some indexes, with more being added quickly. Notably, NQLX plans to list futures on the popular QQQ technology index, as well as some of the Russell indexes. At the outset, even though futures on the same stock may be traded on both exchanges, they will not be “fungible.” That is, you must buy and sell that contract on the same exchange.

The two exchanges have different market systems, even though both are electronic. OneChicago will rely on a lead market-maker system that designates a certain firm to make a bid-offer in an individual stock future, while NQLX has a competing market-maker system, much like the NASDAQ marketplace.

So here’s the big question: Who should be using these single-stock futures? Are they just another table in the casino of the financial markets?

Not surprisingly, most of those close to the new exchanges sing their praises as a mechanism that will reduce market volatility by giving professionals a chance to sell in the futures markets without having as great an impact on the underlying cash prices.

Potential users include hedge funds, day traders, and even fund managers who want to remove the impact of one or two stocks from their indexed portfolios. And of course, single-stock futures create new opportunities for those who think prices will fall. Unlike stocks, these futures can be sold without waiting for an “uptick” (a transaction at a higher price). As long as someone is willing to take the opposite side of the trade, a seller can sell the futures without regard to owning the stock.

Skeptics say that single-stock futures are an unnecessary distraction in a market that has seen more than its share of disillusioned investors. But then, the CBOE was launched in the midst of the l973-74 stock market collapse, and it’s hard to imagine an investment scene without the ability to hedge positions using options. Perhaps one day, these single-stock futures and narrow index futures also will be seen as an integral part of the market.

A final word of warning (much like the disclaimer for the movie “Jackass”): This is a stunt designed for professionals. You should not try single-stock futures without the appropriate training and financial qualifications.

Speculators make the markets go ‘round

Tom Ascher, CEO of NQLX, notes: “Speculators are the grease that makes the market run smoothly.” But he reminds my readers that while futures markets are great hedging vehicles for sophisticated investors, this is no place for amateurs to try to recoup last year’s stock market losses.

And Bill Rainer, the chairman and CEO of OneChicago (and former CFTC chairman), adds: “If they don’t understand how leverage works, they have no business being in this or any other futures product.”

So while single-stock futures may be a clever, profitable and exciting new product, don’t answer that broker’s cold call without doing your homework. Otherwise your own financial future may be in doubt. And that’s The Savage Truth.

Terry Savage is a registered investment adviser and is on the board of directors of McDonald’s Corp. Send questions via e-mail to She appears weekly on WMAQ-Channel 5’s 4:30 p.m. newscast.

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