The Hybrid Zone: Who Holds the Key to Trading Single Stock Futures?
SSF orders entered into Globex will be routed, immediately and electronically, to CBOEdirect for matching. This process, which will add an extra millisecond to an order's turnaround time, could potentially be a cause of concern for speed-driven SSF traders. ""It could be an issue, depending on what kind of customer you are. If you're just a plain old market taker, you probably don't care. But because you're routing first though the CME's order-routing infrastructure and then getting into CBOEdirect, there definitely is another hop that you have to go through,"" explains CME chief information officer Scott Johnston. ""What we've told people is that if speed is the most important thing to you, then you should write directly to CBOEdirect, so that you'll circumvent that extra hop.""
The Amex's Bickford, while acknowledging that speed is the most important criteria for some investors, says that price improvement and size are usually the determining factors in best execution for large institutions. ""What we find, as a primary floor-based market, is that people come to our marketplace doing price discovery. They want to come and find out at what price a particular order trades, and I think our system is best suited to do that,"" he says.
The Amex will be able to provide automatic executions, Bickford says, for some smaller SSF orders. But larger orders could take a little time. ""Should you try to execute something larger than our automatic-execution size, turnaround time probably goes up to somewhere between 30 and 60 seconds on an electronically-delivered order,"" Bickford explains.
SSF investors who crave speed will have one other enticing option: the Island Futures Exchange. Currently, there are very few details available about the Island Futures Exchange. It will be a designated-contract market, and it will undoubtedly market the speed of its SSF executions. But it may face an uphill battle in its efforts to snag liquidity away from larger players, such as NQLX and OneChicago. ""Island certainly has a track record and reputation for speedy technology ... but the flip side of it is, are the other exchanges better positioned to bring in the type of liquidity that is going to be required to make (SSF) a successful venture?"" Schlifstein asks.
But whether you are a proponent of NQLX, Island, Amex or OneChicago, one burning question remains: will SSF contracts succeed? There are some exchanges that are not high on the prospects of SSF. Most notably, Eurex, the New York Mercantile Exchange and the International Securities Exchange have chosen to take a wait-and-see approach, rather than just jump right into the SSF arena. ""From a liquidity-provider perspective, there are any number of (ISE member) firms that would be interested in providing liquidity for this product. But from a (customer) perspective, we have not seen the demand for this product,"" says ISE executive Gary Katz.
Sonic's Orantes retorts that it's a question of when, not if, single-stock futures succeed. The failure or success of each individual SSF market, he says, will ultimately be decided by a market's ability to generate liquidity. ""It does not matter how good your technology is if you can't generate enough liquidity. If the liquidity isn't there, then it does not matter how fast your technology is, because the fact is that (your) order is not going to be filled,"" Orantes concludes.
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A Front-End Forecast
The imminent launch of single-stock futures, in addition to creating new exchanges, will also provide significant opportunities for front-end-workstation software vendors. Brokers and institutions that need electronic access, to the likes of NQLX, OneChicago, Island Futures Exchange and Amex, can either build internal systems or choose from an array of vendor offerings.
As the launch of the SSF exchanges draws nearer, undoubtedly, more and more front-end suppliers will jump into the market. But today, the SSF charge is being led by a quartet of vendors: patsystems, Sonic, Interactive Brokers (IB) and Blackwood Trading.
Blackwood, a direct-access broker, has already written an interface to Globex - an order-routing component of OneChicago - and is in the process of writing to the application-programming interface (API) for NQLX's Liffe Connect trading engine. Moreover, in order to offer its clients access to the Island Futures Exchange, Blackwood will only have to make some slight modifications to the electronic interface it has built to the Island ECN, says Blackwood founder and chief strategist Craig Schlifstein.
IB - a direct-access broker that provides access to a wide range of equities, options and derivatives markets across the world - also plans to offer its clients access to the SSF markets run by NQLX, OneChicago and Island. Steve Sanders, vice president of business development of IB, says the broker has been approved as an NQLX member and is awaiting approval on the membership application it filed with OneChicago. A link to the Island SSF market, he says, is also on the horizon.
Like IB and Blackwood, patsystems expects to provide its clients with access to NQLX and OneChicago. However, in contrast to its SSF competitors, patsystems presently has no plans to build an electronic bridge to the Island Futures Exchange. Citing the fact that there is a ""substantial cost involved"" in writing to the API of any given exchange, patsystems Chief Executive Officer David Jones says that there is currently not enough customer interest in Island's futures market to warrant such a development. ""We're not in this for the sake of developing technology and then trying to find a customer to sell our product to .... But if our customers demanded access to the Island exchange, we'd provide it,"" he says.
Sonic, meanwhile, is eager to build an interface to the Island Futures Exchange - but is not yet sure how to go about that process. ""Island has not been too forthcoming,"" says Sonic vice president of finance and operations Anthony Orantes. ""We have really hounded them for their (SSF) API, but they have yet to give us any information."" Sonic has had, however, more success establishing links to both NQLX and OneChicago. Orantes says Sonic has been approved as a member of NQLX and is awaiting approval of its membership application with OneChicago. Sonic expects to write to the trading engine APIs of both exchanges before they go live.
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