Agreed. You can trade equities retail at 4x, don't see a lot of reason for a product to succeed at only 5x. Why would a fund or institution be compelled to use SSF's?
Futures exchanges are full of products that barely trade like electricity, shrimp etc... Its like a chicken and egg thing. But with electronic trading there should be sufficient depth and 'stealage' from the stock trading side to make it work.
Thanks for the questions...I spoke with the "Managing Director" of OneChicago, and am expecting more answers from him next Monday when we speak again...I'll keep you all posted. Don
Most funds hold overnight because they are too big for super short term, thus 20% should really be compared to 50% overnight requirements. One of the biggest edges I can see is the major savings on interest. When you trade stocks on margin you are paying interest to your broker. When you trade futures not only is there no interest, you can actually EARN interest on the tbills sitting in your account as collateral. Thus the difference from negative interest to positive interest, even at low levels, could easily be a four to five percent profit swing. Too big to be ignored. Also, internet stocks were notorious for hiding behind low float to beef prices up. With single stock futures, you can short the daylights out of something without having to go borrow it first. If some horrible piece of news comes out on AOL for example, the hedgies will be able to make a beeline to the phone and shoot the futures all to hell without the rigmarole of borrowing a single share. Come to think of it, there is an information edge too. You could put on a massive stock futures position via electronic market with less fear that brokers and traders are exploiting the tipoff that comes with order flow. I hope they make it, will keep the game fresh and interesting.
None of the above, I think. #1 will be Island futures Exchange imo. Think of it as Island ECN for futures: electronic, low fees, free streaming SSF quotes, 8am-8pm trading hours. Compare that to the other SSF exchanges: some of them will not be fully electronic (AMEX like SSF Market Makers), others will charge for SSF quotes, third will have shorter trading hours(i.e. they'll close at 4pm, 6:30pm) etc... Island has grown to become the largest ECN, its' business model has proven itself, the same will happen with Island Futures exchange, (if Instinet doesn't cripple it's business model or technology). Fohat
I'm surprised no one is talking about the arbitrage opportunities between the future and the stock. This is the main reason I'm looking forward to them. But without tight spreads, it won't be worth it.
yes, i also think there could be some interesting arb opportunities, especially with the bigger players ie MSFT. Oh and i hear that they have agreed to allow the contracts to be fungible among all the venues.
Darkhorse. interest will be figured into cost of carry. SSF's will trade at a premium to the underlying the same way that index futures trade over cash. The fair value equation is simply interest rate minus dividend yield. As far as funds being able to trade more size in the SSF market then in equities, I'll be shocked. I'm a futures guy. Born and bred on the floors in Chicago. But IMO these contracts are going to be a major disappointment. Except for guys who can't PDT no one needs this vehicle.
Why trade the SSF when you can trade the stock? Well, why trade the stock when you can trade the SSF. I wouldn't minimize the fact they have no uptick rule, being able to short on a downtick is huge improvement. As far as the arb, future against the underlying - too easy I think. Everybody gonna be jumping on that one. I think we will have to be more creative with the arb plays. However, I think we will find that the futures are shooting lower, but the stock is not going down cause it's on a downtick. That may create some divergence in the spread to jump on.
There are two additional factors to consider that no one has mentioned. I trade stocks, futures and options already. I really don't have the ability to start monitoring a bunch of SSF's as well. Something has to give. It's not a question of screen space, I can always add more screens, but someone has to watch the damn things. Everytime I trade a stock, now am I am going to have to calculate the fair value for the SSF as well? And check to see if there is a market in it? I don't think that will happen. Secon, what about the commish? Let's say you use IB. 1000shs of stock=$15.00 RT commish. 10 contracts=$48.00. Wonder if that would add up over a year?