OPENING POSITION
January 2001
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Just in case there was any doubt, mark me a bull on stock futures. I refer to the recently introduced futures contracts on stocks that LIFFE has put into play. You, dear STOCKS & COMMODITIES reader, will soon have the opportunity to trade these. The advantages are many: a single exchange's rules, a single regulatory authority, and a single clearing mechanism. It therefore poses a challenge to US exchanges that have been forbidden to offer anything similar. Nevertheless, recognizing the challenge to US interests, the government has brokered a unique method of ignoring what was heretofore law. Trying to meet its funding constituency -- Congress -- and its subject constituencies -- the exchanges -- halfway, the Securities and Exchange Commission (SEC) and Commodity Futures Trading Commission (CFTC) agreed to allow US traders access to the LIFFE contracts and allow US exchanges to offer similar contracts -- but a year later!
That year gives the US equity exchanges time to lobby against this and, if ultimately forced to offer such a product, gear up for it. Meanwhile, US commodity exchanges, which already have the infrastructure and the clearing mechanisms to handle futures, are ready to do business right now.
Wouldn't it be wonderful to stop worrying about which exchange you're dealing with in assembling a package of equities, options, and futures? You can do it in London now for a restricted list of shares, but not in the US.
Stock futures are the capstone in two decades' proliferation of financial trading vehicles. These days, it's hard to think of a financially expressible risk that can't be hedged. Even an individual stock's fluctuation can be hedged, though pricing remains to be seen. (If options are any indication, it won't be cheap!) We can settle down to some fierce competition among the world's exchanges to see who survives.
Simple access to trade each other's products won't be the end of exchange competition. What's desirable and achievable is a single place for public trading of complex instrument combinations. Otherwise, more and more products will move off the public screen to private ones, with attendant problems in price discovery, regulation, and public transparency.
Markets are fragmented now, but I'm convinced that competition will sort things out if outdated regulation were abandoned. The exchange that can get there first with all the tradables, the electronic infrastructure, and the clearing for all types of trading vehicles will be the exchange of the future. It doesn't look good for the US, even if New York is the world's financial center: the equity exchanges don't have the capital or the will to grow, the commodity exchanges have the will and the smarts but not the cachet to handle equities, the newbies are pitifully small, and US regulators don't have a united industry front to deal with.
The US's lunch is on the table. Who wants it?
John Sweeney, Interim Editor
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