As Single-Stock Futures Draw Closer, Diversification Has Become a Key Theme

The long-awaited U.S.-debut of a quartet of single-stock futures exchanges is drawing nearer. OneChicago, an all-electronic joint venture comprising the Chicago Board Options Exchange, Chicago Mercantile Exchange and Chicago Board of Trade, is set for an Oct. 25 launch -- pending Securities and Exchange-commission approval of its customer margin rules. Meanwhile, the rollouts of Nasdaq-Liffe Markets (NQLX), Island Futures Exchange and the American Stock Exchange's SSF pit are expected to occur later this year.

But what is driving the move of established exchanges into uncharted SSF territory? Well, at least in the case of the options markets involved in the SSF push, diversification is a motivating factor. SSF, or futures based on individual stocks, have not been traded in the United States for more than two decades. However, floor-based options markets such as the CBOE and the AMEX, facing increased competition supplied by the all-electronic International Securities Exchange, are looking for ways to diversify -- and see ample opportunity to do so via the trading of SSF contracts.

William Brodsky, chairman and chief executive officer of the CBOE, says that the CBOE's participation in OneChicago will help the exchange diversify its product range. "We recognize that people who have previously traded single-stock options may want to trade single-stock futures," he says.

However, while acknowledging his exchange is facing a competitive threat from the fast-growing ISE, Brodsky emphasizes that the CBOE is not participating in OneChicago simply as a means to add another revenue stream to compensate for dwindling options profits. "Our participation has nothing to do with pressure from all-electronic (options) competitors," he says. "Collectively, (the CBOE's owners) have about 7500 members, so why not pool our resources and be the most successful exchange trading SSF contracts? "

Similarly, the AMEX thinks that adding a successful revenue stream is not the main objective of its entrance into the SSF arena. The AMEX -- the only exchange that plans to trade SSF contracts on its floor -- is, however, keen on the idea of diversifying its product portfolio. "Adding a fourth business line is certainly something we're interested in," says Michael T. Bickford, while noting that the exchange already trades equities, options and exchange-traded funds in its open outcry environment.

Bickford, the senior vice president responsible for options trading at the AMEX, says that it would not make sense for the exchange to enter the SSF arena solely as a means to add revenue -- because the SSF industry may wind up being just as competitive as the U.S. options marketplace. "Quite honestly, I'm not sure that SSF won't quickly become as highly competitive as options is .... So, yes, you may be adding an additional revenue stream, but you may find yourself with the same kind of pressures that you (face) in the options business today," he says. The AMEX, says Bickford, will attempt to compete for SSF order flow by leveraging the existing liquidity on its options floor. "We see( SSF trading) as a natural extension of our current derivatives business, and we think we have built-in pools of liquidity that will help us become a force in that business," he says.

Not surprisingly, the ISE -- which has seen its U.S. options market share increase from two percent to roughly 24 percent over the last two year -- has a different take on its rivals' planned participation in SSF markets. Bruce Goldberg, senior vice president of business development at the ISE, says the CBOE and Amex "have to diversify their revenue streams," because the profits have floor-based markets have dwindled in the face of all-electronic competition. "I think it's become more competitive in the options business, and they have looked inside themselves and said they need to diversify -- to get into other businesses to be profitable," he says.

Interestingly, the ISE has no current plans to get into the SSF arena. Goldberg says that the ISE's customers have provided very little support for SSF, and the exchange is therefore going to take a wait-and-see approach. If SSF trading proves liquid, and there is sufficient demand for the product from the exchange's market makers, the ISE will consider leveraging its technology to make an expeditious move into that market, says Goldberg.

The Philadelphia Stock Exchange.is yet another options market that is evaluating SSF trading. Like the ISE, the PHLX has made no final decision, but is not in a rush to get into the SSF market. PHLX Chief Information Officer William Morgan says the exchange "continues to look at single-stock futures," but declines to elaborate.