Stocks or Futures?

Remember that the eminis are all electronic, there is no pit or locals. To the extent that the smaller emini contracts and the larger pit contracts interact, there obviously is still a factor of pit locals playing a significant part, but as eminis continue to grow in volume (and dollar volume), they are becoming a force in their own right.

 

Stevene9: “To the extent that the smaller emini contracts and the larger pit contracts interact, there obviously is still a factor of pit locals playing a significant part.”

As far as the present is concerned, the locals are alive and continuing to press the market or chop it up when it is in there best interests. Any intraday Mini trader will feel the effects.

“but as eminis continue to grow in volume they are becoming a force in their own right. ”

Agreed. But that in no way invalidates the idea that, until the day arrives when the dealers leave the pit and trade off of Mini-machines (Globex terminals) exclusively, disregarding the action in the pit is a perilous endeavor.

A fully electronic market may come to pass but the future, as well as the present liquidity, won’t/isn’t predominately coming from small speculators. Dealer activity will still drive the market, be it open outcry or electronic, and having an idea of what motivates big money to enter can be rewarding.

 

Concerning market makers for single stock futures, they will still be a factor, if only because they are trading the underlying stock. So if a MM wants to sell 1 million shares of a certain liquid stock, you can be certain they might turn to the futures market for part of the order.

 

Good article on single stock futures...
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http://optionetics.com/articles/article_full.asp?idNo=4424

Single Stock Futures Trading Moves Toward First Phase Realization

By Shelley Souza, Optionetics.com
7/27/2001 8:00:00 AM

Remember the excitement that rippled through the stock-trading community briefly last year, when there was talk that single stock futures trading would be available to American traders and investors? Then it all died down again because working out the regulations, which exchange to carry the market, and all the rest of the details required to make it happen were going to take longer than had originally been anticipated. But time has passed and it seems we’re finally moving toward implementing the first phase of this new market for traders and investors. In light of this new investment arena, I thought it might be useful for stock traders who are unfamiliar with the futures markets to have a brief understanding of how single stock futures would differ from the stock market.

Part of the complexity in working out operational details in creating the single stock futures product has been to ensure customer protection. Stocks are also called equities for the simple reason that owning stock gives you “equity” in the company. You become an owner, or shareholder, in the company in which you have invested. In theory, you can hold this stock indefinitely, for as long as the company continues to trade publicly. Futures markets are finite. Goods are produced and delivered; then the contracts start all over again (this is the basic idea, although you can also can buy or sell far into the future).

Commodity markets are called futures markets because traders are speculating on the future price today—as opposed to most stock investors who buy stock with the belief that it will go up over the long haul. This same premise, of betting on the future price of the “commodity” will be the foundation of the single stock futures. Those who engage in this market will be betting on the future value of the stock in question. It’s a mechanism that could also allow public corporations to hedge against market volatility in their stock price in much the same way that hedgers protect their risk against fluctuations in the future price of commodities. This will be one of the unknown factors that could also affect the volatility of single stock futures options.

Betting on the future today means that traders in futures markets are speculating on the odds of the commodity going up or down, or remaining unchanged, some time in the future. While fundamentals play a role, commodity futures markets play a different role from the stock market because futures contracts are finite. They expire when a producer is expected to deliver the goods.

Futures markets were created for the purpose of hedging, or protecting, producers against unknown factors. Some of those risks were “cost of carry” charges, the fees a farmer has to pay to store their crop in a grain elevator until the buyer is ready to take delivery; weather conditions, crop conditions, etc. Farmers needed a way to hedge their risk. If they decided they wanted $2 for their wheat crop because they couldn’t produce wheat for less than that price, the best way to insure themselves against unknown factors was make an agreement with the commercial producer to sell their crop for $2 ahead of time, regardless what the crop would actually be worth at the time of delivery. Now their price was locked in, no matter which way the price of wheat went.

However, if their crop, through external forces, ended up being worth $3 dollars by delivery time, they were losing a dollar on each unit in terms of the fair market value. Since their price was locked in—a subsistence price—how could they cash in on the fair market value? The Chicago Mercantile Exchange gave farmers and commercials a way to protect their prices by hedging them with futures contracts. Commercials could hedge against a drop in the price of wheat so that they weren’t paying the farmer a price greater than fair market value. Into this arena, came the speculators: large traders known as “locals” who trade on the floor or professional traders who trade off the floor and “small specs,”small traders who are similar to regular investors and traders in the stock market. Eventually, the futures exchanges began to provide markets for speculators who were interested in betting against the future direction of stocks, currencies and other financial instruments.

So, this is the environment in which single stock futures is going to exist. It means the new market could be much more volatile than the regular stock market (although Nasdaq watchers might find that hard to believe). It also means this market could (and probably will) affect the cash market—the stock market. The futures markets already affect the stock market through fair value. Every morning CNBC and other news sources that watch the pre-open on the market give a sense of where the market is likely to open based on the futures markets. The fair value refers to the Dow Jones, Nasdaq and S&P indices.

In May, the Chicago Mercantile Exchange and the Chicago Board of Options Exchange, agreed to jointly deliver the highly anticipated single futures contract later this year. The Chicago Board of Trade (which is the one of the main futures exchanges) will have a limited stake in the venture. In their announcement, the president and chief executive officer of the CME, Jim McNulty, said that the joint venture would address the concerns of their largest customers “who have emphasized the importance of collaboration between the CBOE and CME to combine the capabilities, distribution and connectivity of the futures and securities worlds.” He said the alliance between the CME and CBOE “should also provide the highest level of capital efficiency for our customers who trade in both futures and options.” This has been the greatest challenge for the exchanges to overcome: to create a hybrid product created from markets that have different time frames, objectives and clients.

The contract will be traded electronically using the CBOEDirect™ electronic platform or CME’s Globex®2. December is the current due date for public trading to begin. If nothing else, getting it up and running is sure to be a fascinating endeavor!

 

this is one of the reasons why i think it would be better to concentrate on one market and trade it day by day: working like this i guess one should be able to learn the details of all the specific games and fakes of this single market. if somebody trades only one ("his") market, he should be in advantage to anybody who trades that market only once in a while.