Chicago Bets on Risky Futures


Chicago's two major futures exchanges and its options exchange are joining forces to bring a controversial product to the U.S. -- futures on individual stocks. The Chicago Mercantile Exchange joined hands on May 14 with the Chicago Board Options Exchange (CBOE) and the Chicago Board of Trade (CBOT) to set up a joint-venture company to introduce so-called "single-stock futures." Says CBOE Chief Executive William J. Brodsky: "Our willingness to work together on this venture will ensure that Chicago remains the world center in derivatives trading and risk management."

But it remains an open question just how receptive investors will be to the futures, which have gotten off to a slow start in Britain. Trading in the contracts on the London International Financial Futures & Options Exchange (LIFFE) began on Jan. 29 and remains modest, far overshadowed by the trading of equity options and other products there. What's more, it's far from clear that the Chicago markets will work all that enthusiastically to pitch the products. Admits one Chicago partner, CBOT Chief Executive Officer David J. Vitale, "a lot of people are quite skeptical."

The potential is certainly there. The joint venture should get a hefty share of the market for similar products that now trade around the world in such forms as swaps and so-called synthetic futures built by using offsetting equity options, says Merc Chief Executive Officer James J. McNulty. Until federal law was changed last year, futures on single stocks had been barred in the U.S. since the early 1980s, while regulators fought over who would oversee the products. Losses on futures can be far larger than on straight equity or options trading.

LACKLUSTER IN LONDON. The Chicago Board of Trade appears less enthralled with the products' prospects than its other two partners. The CBOT is taking a junior position in the venture, and will hold just a 10% stake, while the other two Chicago bourses each hold 45%. The CBOT's backseat role was underscored in the May 14 announcement, staged by the Merc and the CBOE, whose officials crowded the table at a press conference in Chicago. By contrast, CBOT Chief Executive Vitale took an offstage seat in the audience. And CBOT Chairman Nicholas Neubauer, who did not attend, commented only for a press release, saying his members "will make important contributions to the success of this venture."

Indeed, it may take an enormous amount of interest on the part of members of all the exchanges to make a success out of single-stock futures. They haven't been rockets in London. On May 14, for instance, just 5,406 such single-stock futures contracts changed hands at the LIFFE, compared with nearly 790,000 products of other kinds. Equity options alone outnumbered single-stock futures by nearly 4-1, with 20,966 such options traded on the London market.

Part of the reason for the lackluster debut on the LIFFE is that the exchange has moved slowly to popularize the products. It trades futures on just 65 stocks, including 25 that were added on May 14. Such newcomers as AOL-Time Warner and Wal-Mart Stores joined the likes of Bristol-Myers Squibb, Pfizer, and European stalwarts as BNP Paribas and Barclays.

COMING SOON. What's more, the pace of popularization may grow, since Nasdaq on Mar. 26 announced plans to partner with LIFFE to offer single-stock futures in both the U.S. and Europe. Nasdaq Chairman Frank G. Zarb predicted at the time that the futures would "become important investment vehicles" in both the U.S. and Europe.

The Chicago bourses won't be keeping would-be traders waiting too long. By law, institutions will have the right to trade futures on single stocks as of Aug. 21, and then individual investors will get the go-ahead on Dec. 21. Soon after, it may become clear just whether these products will be the next big thing for investors around the world -- or just another risky offering. By Joe Weber in Chicago


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