Thought this would be of interest, should be in todays WSJ: Firm Sets An Early Price For Trading Single-Stk Futures By KOPIN TAN Of DOW JONES NEWSWIRES NEW YORK -- Thomas Peterffy can hardly be accused of being behind the curve. The chairman of Interactive Brokers Group steered his Greenwich, Conn., firm toward electronic options trading in the 1980s, long before technology was in vogue and Bill Gates was a household name. Now, as U.S. regulators finalize rules that will allow single-stock futures to begin trading, the electronic brokerage firm has fired a first salvo: Interactive Brokers indicated this week it will charge retail customers a flat rate of $1 a contract to trade single-stock futures, which are futures tied to individual stocks and which are available in Europe but which haven't been traded in the U.S. for nearly two decades. "$1 per contract may sound like an unusually good deal," Peterffy said. "It is our goal to continue to provide the fastest and best execution for our customers' orders at the lowest cost in the industry." The move gives an early indication of the kind of commission rates and costs individual investors might expect from electronic direct-access brokers when single-stock futures begin trading, expected later this quarter (although that start date has been postponed several times before). Interactive Brokers said its $1 rate is expected to cover exchange-related and clearing costs, even though the exchanges themselves have yet to finalize these. Right now, U.S. authorities are putting the finishing touches on regulations governing single-stock futures, such as margin requirements and tax issues. Exchanges that will trade single-stock futures - including OneChicago, the Nasdaq Liffe Markets and Island ECN - haven't said definitively what exchange-related fees they will levy, although people familiar with the matter estimate it might range between 25 cents and 40 cents a contract. At this stage, many brokerage companies say they haven't finalized their commission rates for single-stock futures. Peregrine Financial Group, a Chicago-based futures commission merchant that runs "Best Direct," an online futures platform, said it expects to charge rates very similar to popular electronically-traded index futures contracts. These could range between $8 and $18 a contract - depending on factors such as volume - and will include exchange-related costs, said Russ Wasendorf, Jr., Peregrine's chief operating officer. Retail commission rates could be higher, although they would still likely be lower than the cost for trading options. Not surprisingly, that could prompt inevitable pricing comparisons with options. For instance, Interactive Brokers currently charges retail customers $1.95 a contract to trade options, nearly twice its rate for single-stock futures. Comparing Costs Between Options, Single-Stock Futures But people from both sides of the options and futures divide say that comparison is unfair, since the two are essentially different: options give investors the right - but not the obligation - to buy or sell stock at a specific price within a set time; single-stock futures are contracts pegged to a company's shares settled at a predetermined delivery date, either by cash or delivery of stock. But to average retail investors looking for a derivative to hedge their stock position, single-stock futures' cheaper costs might prove persuasive. If that is the case, it may not be good news for the options industry, which has recently seen volatility and trading volume slump. With stocks, options and single-stock futures, Interactive Brokers is able to minimize its transaction costs essentially because its electronic automated platform cuts down the handling and processing involved, and because it pools customer orders to maximize volume and efficient execution. But the commission rate for single-stock futures is substantially lower than that for options for various reasons. "It is easier - faster, less error prone, less subject to recall or adjustment - to execute a single-stock future than an option because all the proposed single-stock futures exchanges are purely electronic and provide members with lock-in trades," Peterffy said. "Four of five options exchanges are open-outcry, (and) they all have numerous restrictions about what orders are eligible and how the trades are supposed to be represented." Still, industry watchers say they don't believe the advent of single-stock futures will hurt the options industry, chiefly because of the inherent differences. "Option prices represent probabilities associated with various price outcomes, while futures only indicate the direction of expected price moves," Peterffy said. As such, option pricing is far more complex, featuring an array of strike prices and factoring in constantly shifting risks and premiums, all of which justify the higher transaction costs, option traders say. "Every time we've seen a significant index future come along, not only did it not take away from the cash markets (including the options market), it in fact gives market makers a better opportunity to offset their costs and risks," Wasendorf added. "If single-stock futures take off, it's going to create and add more volume to options trading." -By Kopin Tan, Dow Jones Newswires; 201-938-2202; kopin.tan@dowjones.com Updated April 2, 2002 1:51 p.m. EST
def, 2 questions 1. Do you know when are we able to trade with SSF ? Now that IB has come up with the commission rates, can i assume that the exchanges are rolling out SSF soon ? 2. The other thing is which IB account should we be using for SSF trading ? Do we need to apply for a new SSF trading account ? Thanks in advance
1. We are ready but I don't think the exchanges/regulators and many of the brokers are. Last i heard that the launch might be pushed back till June 1st. 2. Not sure. As they are regulated by CFTC, you'll probably have to open a futures account or some kind risk disclosure. By then we most certainly will have an all in one account and it might just be an issue of signing some more docs/risk disclosures.
Greenwich, CT, April 3, 2002 - In response to frequent customer inquiries, Interactive Brokers LLC (IB) has announced that its retail commission rate on single stock futures will be U.S. $1.00 per contract. The minimum ticket order is one contract (US $1.00). IB will provide single stock futures routing capability to the NQLX (Nasdaq-Liffe), OneChicago, and Island once these venues become available. "Our dynamic order routing among the three most likely liquidity centers for single stock futures for a commission of only $1.00 per contract may sound like an unusually good deal. This is true, but it is only in line with our current commissions for stocks, options, index shares and futures," said Thomas Peterffy, Chairman of the Interactive Brokers Group. "It is our goal to continue to provide the fastest and best execution for our customers' orders at the lowest cost in the industry."
I'm a big fan of IB. In fact, one of my first accounts with them was opened within weeks of when they 'went mass retail.' One of the things I really like is that they will start low, and drive prices even lower. I've enjoyed the benefits in both equities and futures trading. Knowing that I really like IB, I'll use them in my following example. According to the article posted above by def, places like PFG can be used in the same example, just multiply your costs by 8 to 18X. The whole thing about SSF's has me scratching my head a bit, as well as moderately worried because I'm really looking forward to their introduction. Perhaps I'm just a bit confused, and I hope someone can help set me straight. Hypothetical situation: I have a $50K equities account, avoid Pattern Daytrader Rules, and get 25% margin with that. I want to get long 3000sh of a $30 stock. So, I'll tie up $22.5K of my account and pay (500x$.01 + 2500X$.005)=$17.50 commissions. Now, using SSF's to accomplish the same position: I'll tie up $18K in account equity and pay (30 contracts X $1)=$30 in commission. I'm worried that the underlying fees which will ultimately drive the minimum commission structure could keep away the liquidity. It sounds like these are still subject to change, and as such, are somewhat of a wildcard. Someone doing 50,000 to 100,000 shares/day will likely be deterred from trading these because of higher comparative commissions. Without the big players arb'ing or actively trading these, the spreads will widen which will further discourage volume. SSF's will start to trade like options instead of eminis, which I guess is exactly the point for some of the backers.
very interesting example ... I would think one of the major uses of SSF's would be shorting, not having to worry about the uptick rule, assuming the spreads are not too wide. Waiting for an uptick vs. the extra commissions + spreads will be one of the deciding calculations in deciding which route (sotcks vs. SSF) to take. Def : thanks greatly for all your info. Do you know WHICH stocks will be offered when IB goes live ? and which exchanges ? M
IB will offer whatever the exchagnes offer. You'll have to check out the individual exchanges for the list. OneChicago announced their initial list and also posted a list of about 25 or so market makers who will be obligated to provide liquidity. I'm not sure what the other exchanges plan at this time.
when the participant shorts SSF, they will need to cover back in SSF and that drives up liquidity. I think the liquidity will be higher when the stock is moving down since many shorts would end up in SSF. There may be less incentive to trade SSF when most traders are going long, due to commission.