http://www.futuresmag.com/2014/06/16/weekly-stock-futures-hoping-to-follow-success-of-w I decided to put this up on the Stock trading forum. Given that people like to lever up their stock trading. This is the initial attraction that brings people into Options. I was wondering why the lack of interest in this product?
The answer to the question lies in the value of the product. SSF allow customers to carry exposure in a levered manner at very competitive interest rates. Brokerage firms make money from their customers not by charging $5/trade but by financing their customer's activity in margin accounts at rates much higher then would be priced into the SSF. Once an equity has been purchased on margin the position is considered collateral for the loan and the firm loans it out in the very lucrative Securities Lending marketplace. Brokerages view SSF as a threat to their profit machines and deny access. It isn't complicated. The weekly futures we are bringing up will have some unique characteristics. First, they will all settle T+1 vs T+3. Purchase an expiring weekly future and you will have stock the next day. This particular trait was to satisfy an unwritten but generally enforced rule under IRS Code 1058 (dealing with non-recognition treatment for tax purposes on the transfer of securities pursuant under Securities Lending) that you need to be able get the stock back within 5 business days. Weekly futures with next day settle assures this. Secondly, these types of loans don't always conform to a Friday to Friday term. Accordingly we will be launching weeklies that will begin on Monday and expire the following Monday; Tuesday to Tuesday ; Wed to Wed etc. There will be a SSF that will expire each day that will deliver the stock position the next day. All of our new weeklies will be part of our OCX.NoDivRisk suite which removes dividend variation risk from contract leaving the pricing very simple: SSF= STK_Price + Interest It's a financing trade. For Hard to Borrow names the Sec Lending rebates are priced in as a negative interest rate. Plugging a negative rate into the equation above you will get SSF<STK_Price and as time to expiry approaches zero the discount disappears as the SSF rises to the STK and the holder realizes the Sec Lending rebate without having to split any with the brokerages. Best David G Downey CEO OneChicago, LLC
sorry....the above post got cut off. It should have finished: ......you will get SSF trading below the cash (SSF<STK_Price) with the distortion representing the Sec Lending rate. As expiry approaches the distortion abates and the SSF rises to be equal to the Stock price through expiration. Profits do not need to be split with the brokerages. Best David G Downey CEO OneChicago, LLC
Thanks for chiming in Mr. Downey, I am a believer in the value of the product. It is unfortunate about the structural impediments that SSFs face on the equities side. The Futures side is quite stifled as well. There is a lag in the industry has kept retail futures options platform development behind the pace of stock options. This may be attributed to insularity in the Chicago futures business. We look to OneChicago to spearhead further product innovation, platforms, and data dissemination that would bring in more retail participation as well. It is a space that you own completely.
the hard to borrow names is the real value here (not efp's and interest rates). Anyone who is long term bullish a hard to borrow name (like GPRO) should be able to buy the SSF's at a nice discount. Why would you buy the equity? It is equivalent to buying the stock and lending your shares (without having to lend them or find a broker who can lend them). You also don't have to deal with many other things like the change in cost to borrow/lend shares - and things like shares being returned or recalled and the illiquid lending markets etc etc OneChicago should list LOCO and names like this if they actually want the retail business