The Single-Stock Futures Puzzle

Backed by a pair of exchange alliances, single-stock futures contracts are getting set to make their debut in the U.S. However, the landscape of the U.S. SSF arena remains unsettled, as many European and American exchanges ponder whether they should join a marketplace that has already fueled a rift between the CBOT and Eurex.

With the launch of single-stock futures (SSF) on the horizon in the U.S., hype about stock/derivatives integration has seemingly reached an all-time high. But are SSF going to be the next big thing in the financial services arena, or will these hybrid contracts--futures based on individual stocks--eventually prove to be just a blip on the radar screen?

Well, based on the fact that the Nasdaq Stock Market, London International Financial Futures and Options Exchange, Chicago Mercantile Exchange, Chicago Board Options Exchange and Chicago Board of Trade have all invested capital in the potential of SSF, one could logically assume that the ceiling for these contracts is very high. However, since U.S. exchanges have been prohibited from trading SSF for almost two decades, no one can predict the success or failure of this soon-to-be-launched market with any certainty.

As of today, we know the following: two major exchange alliances--one comprised of the Nasdaq and Liffe and the other featuring the CBOE and CME--have been formed in preparation of the roll out of SSF in America. Both partnerships have been structured as joint ventures and both call for the allies to launch separate, all-electronic, for-profit, U.S.-based SSF exchanges--featuring independent boards and management teams. And we also know that the CBOT has taken a minority stake in the CBOE/CME joint venture, much to the displeasure of its global derivatives partner, Eurex (see sidebar).

Moreover, come Dec. 21--the date the 19-year-old federal ban on trading SSF in America will be officially lifted and trading of the contracts will commence--we should begin to understand which direction the SSF exchanges are heading in. But until that time, the SSF evolution will continue to generate more questions than answers.

For example, why has the CBOT taken only a limited stake in the CBOE/CME joint venture, and how will this affect the exchange's relationship with Eurex? And, perhaps most significantly, will the other major global players in the stock and futures markets--most notably, the New York Stock Exchange and American Stock Exchange in the U.S., and Eurex, Euronext and Stockholmborsen in Europe--form SSF partnerships of their own?

Not surprisingly, there is no stock answer to the latter query. The European markets, for their part, seem to be content to let the existing SSF allies sail into uncharted waters by themselves, while the NYSE--publicly, at least--has stated that it has no intention to trade SSF. The AMEX, on the other hand, is anxious to establish a foothold in the U.S. SSF market.

Through SSFs, says an exchange spokesperson, the AMEX could not only offer more choices to investors, but also provide its floor members with more contracts to trade and hedge. "For those two reasons, yes, it's a business that we are pursuing and will enter at some point," he says, noting that the AMEX already trades a diverse group of products that includes equities, options and exchange-traded futures.