Tks. This is a fun little trick to know, maybe I will use it one day when markets are cheap and oversold and I want some extra exposure. But I probably wouldnt go above 1.4-1.5 to 1 leverage
I mean you dont run the risk of having the broker change the rules on you and ask for the money back (or pop the interest rate), or use some obscure clause in the margin contract, etc, etc
in that sense, you are right, it is a better alternative for borrowing but what would you do with that credit (while having a maintenance margin) is another question.. -- nice thread
A little fun history lesson. The S&P 500 contract was going to be delisted by the CBOE back in 1985 because no one traded it and all the volume was in the OEX. Thomas Peterffy convinced the CBOE to re-launch the product as a European exercise contract and promised he would provide liquidity if they would allow him to put computers in the pit. It was the first pit in Chicago that allowed such electronic access and it's more than ironic that it is the last pit standing. But it was the subtle change from American to European exercise that made the product so successful as it turned the product into a vehicle by which lenders and borrowers could interact directly without the intermediation of a middleman under the umbrella of the then AAA credit rating of the Options Clearing Corporation (now the AA+ OCC). The big break for the product came in the aftermath of 1987 crash as credit and liquidity dried up and all traders were desperate for cash. The product has grown ever since and remains an effective way for savvy traders and financiers to interact anonymously. Of course the same financing benefits can be had by utilizing Single Stock Futures.
Thanks, that's actually an interesting bit of history. We can only hope that SSFs finally have their day in the liquidity sun after a similar largely failed launch. I don't see how they can even afford to keep the infrastructure for them up with their dismal volumes.
Just to add a bit more color to the story (actually never knew the first part), computers weren't actually allowed in the pit. Timber Hill's agreement with the exchange allowed them to put them in their booths next to the pit. Visible to the their traders in the pit was a computer screen with colored boxes that represented their markets on certain options. They were supposed to tell other traders what their colored codes meant, but generally made things up. For more complex trades, they would flash hand signals to their booth and their clerks would check the computer and flash what their markets should be back to them. Back at that time their was no computerized trading at all. Only paper sheets were actually allowed in the pits. In the late 1980's the OEX pit had around 400 people in it, while the SPX pit was much smaller. Today the OEX pit has 2 people in it (others quote electronically), while the SPX has maybe 50.
Not to worry. We have been profitable for some time. We are very different from most exchanges in that our revenues are dependent on Open Interest and not just on volume as we collect a financing fee for each day the positions are open. We built all of our systems and are in complete control of the costs. What is impressive is that the firms still do not allow access to the product for customers...both retail and institutional....but they utilize the product for their own proprietary needs. Margin for uncleared swaps is going to help a great deal and when the SEC finally gets around to fulfilling their Dodd Frank mandates the business will really begin to take off. But that is not the business that we are really after. Securities Lending and Equity Repo is the prize and I believe it is close. Best David