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Portfolio > ETFs > Broad Market

Celent on Single-Stock Futures: Some Short-Term Wo

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BOSTON (–In its most recent report, Celent Communications LLC argues that the introduction of single-stock futures into the United States may prove the victim of poor timing.

Though more optimistic about their use in the long term, Celent, a financial services research and consulting firm, found that single-stock futures would likely not be fully used in the near term.

The Celent report said current depressed condition of U.S. equity markets and a lull in technology investment have combined to make this a bad moment for the double launch of single-stock futures by OneChicago and Nasdaq LIFFE Markets, which took place earlier this month. (Previous HedgeWorld Story) Furthermore, the report, prepared by senior analyst Fritz McCormick, expressed concern that neither of the two exchanges intends to make their products fungible (i.e. to give traders the ability to open a contract on one exchange and close it on the other).

“While it seems these exchanges are attempting to corner liquidity,” Mr. McCormick wrote, “…they are instead digging themselves into a hole from which it may be hard to escape. Without adding the liquidity that fungibility would encourage, it is entirely possible that one or more of the single-stock futures exchanges could fail in its attempts to create a new marketplace.”

But the importance of fungibility is likely to become clear fairly early on, in the growth of this market, to investors and market makers, who may well prevail upon the exchanges to adopt such a policy before that hole can be dug to a fatal depth. Furthermore, other exchanges will jump in and that will increase the competitive pressures.

The report also addresses the overseas experience. Why has so little come out of attempts at creating a market in single-stock futures in Australia, the Netherlands, Singapore, etc.? Mr. McCormick suggests three reasons, each of which may also serve as a reason why take-off may well occur in the United States although it has not, elsewhere.

First, Mr. McCormick writes the United States has a unique retail options and futures culture, which gives the new instruments an air of familiarity here, from birth.

Second, the instruments were not actively marketed abroad. They are already being very aggressively marketed in New York and Chicago.

Third, the demand for these instruments may be a uniquely American phenomenon due to this country’s larger appetite for risk and…general entrepreneurial bent.

Mr. McCormick’s report ends on an optimistic note, then. He believes that these instruments have a lot of inherent advantages–it is very easy to do with futures what can be done only clumsily with synthetic options–and in time, he writes with a significant amount of continued education and marketing, investors will avail themselves thereof.

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