Makes perfect sense, thanks! I was aware of the margin/funding issues with long-short strategies in cash markets, but it hadn't clicked that SPAN would address that.
In the early days of the OneChicago, I asked them why only 100 shares per contract and why they have listed stocks that are traded in the single dollars. The notional value did not make sense to give it an advantage over stocks. Also, the margin is 20% (maintenance and initial) and that would be equivalent to roughly $33,500 in today's prices if the ES had the same margin. I guess at the end of the day, you need to have the right leverage, margin, and cost for the market to get interested. I believe that Eurex provides size which is 10, 100, and 1000 shares for it's SSFs. Maybe that is why some still maintain it.
Exactly my point. So OneChicago should've marketed it directly to individual investors harder not just on ET to let the individual investors realize its benefits to them.
Yes SSF would be especially attractive for VIX products and the Direxion leveraged instruments. They are all HTB and it's pain in the a$$ to borrow them from brokers even including IB which constantly forces you to close your positions even when they are ITM all with the excuse of "risk management" with their unreasonable and flawed model.
Wouldn't be surprised if it was true. Any brokers would've conflict of interest if they had any ownership of OneChicago. Would make more sense for OneChicago to be affiliated or owned by an exchange instead of a broker. IB has stock yield enhancement program which would've eliminated many potential benefits of trading SSF.
If you were able to do SSF in those products the market would price in the extreme lending rate and HTB status (just like with options), so no free lunch if SSFs available in those names...
qwerty11: Not sure what you are talking about.... What about all the traders buying the htb security (long term holders of the equity) and never getting the benefit of the hard to borrow rate. Even at IB you may not get anything. The point is the SSF would be trading at a discount to the stock - so yes it would be a "free lunch" for them. Why pay X for the stock when you can pay less than X and then hold to expiration (without assignment risk) and then simply take the stock? If you simply buy the stock - the broker will more than likely collect the short fee. Buy the SSF and you will get it via the discount. Could you do these types of trades with options? Yes and no - buying at a discount is possible but you would have issues shorting the equity at a discount as you would have assignment risk if you sell calls - thus borrow rate risk. There is also some dividend risk doing the option synthetics. Of course you are likely making the assumption that markets are efficient and there are no possible arbs.... How about this? A few traders have found some great trades at OneChicago.....You should have seen the discounts in the TLRY ssf's about 20 months ago. Why buy the stock at $135 when you can buy the 5 month SSF at less than $30 and then buy the $150 put for $66 (same expiration month). Market efficiency? - too funny. TLRY1DH9 2018-10-10, 1 28.2692 TLRY1DH9 2018-10-10, 1 28.35 TLRY1DH9 2018-10-10, 5 28.35 TLRY1DH9 2018-10-10, 3 28.35 TLRY 15MAR19 150.0 P 2018-10-10, 2 65.6 TLRY 15MAR19 150.0 P 2018-10-10, 3 66.1 TLRY 15MAR19 150.0 P 2018-10-10, 5 66.5 No buy in risk and no risk of ever being short the stock as I didn't sell calls.....although I should have to create a true synthetic and would have made another $15+ Q: You want to know why there are "free lunches"? A: It's because 99% of traders simply assume there is "no free lunch" without actually doing the work. I'm hungry now.....What's for lunch?
You give the perfect example yourself: "Why buy the stock at $135 when you can buy the 5 month SSF at less than $30" My point was the same effect (although smaller) would happen to VIX or Direction products if SSF available. Your example (although it is a really good trade) has nothing to do with my post because the discussion was about going short via SSF and you go long via SSF and also combine with an option. You didn't want to go short TLRY SSF at < $30 so that was no free lunch...
LOL!! And there are just as many times where it is actually beneficial to go short the SSF when you compare the synthetic bid in the options market vs the SSF bid i.e - you can get a better price + plus no borrow fees + no risk of buy-ins The point is - SSF's offer investors an opportunity (both the buyer and seller) to share in the cost of the high borrow rates. for example: stock XYZ is $25. The borrow rate is 10% The 6 month theoretical synthetic would trade around $23.75 (zero interest rate/zero dividends) So - going short the stock would cost about $1.25 in fees for six months or you could sell the synthetic (with limited assignment risk) for about $23.75. However, long term investors (willing to hold for 6 months) are better off buying a SSF than buying the stock (ie a price of $24.375 would save them .625). And the short seller would also be better off by .625. This is why SSF's make sense. The cost to borrow go directly to buyer/seller. No SSF's - and the $1.25 goes directly to the broker via lending out the shares. A liquid viable market for HTB names would definitely lower the rates on these shares. IB is one of the better brokers that allow you to lend your shares but there are issues: 1) you only get 50% of the rate 2) they can't be shares your purchased on margin 3) IB may not be able to lend them better than nothing.... but ssf's will be back......