I Increases in Volatility As stock markets throughout the world moved ever higher in a seemingly endless trend from humble beginnings in the early 1980s, volatility increased dramatically. When the biggest bull market in history came to an end in early 2000, intraday price swings in individual stocks as well as in the major stock indices were immense in many of the so-called momentum stocks. Some stocks rallied thousands of percentage points in only a few months. In addition, it was not uncommon for stocks to double or triple literally overnight in the initial public offering (IPO) market. Then, as a new bear market started in 2000, the painful reality of excessive enthusiasm, overstated earnings, and decreasing profits took their toll on stock prices. Some stocks declined by 50 percent in a matter of days, and others ultimately fell by over 90 percent from their bull market peaks. As volatility in individual stocks continued to increase, futures trading suddenly seemed less speculative than stock trading or even investing. How so? Some stocks could lose 50 percent of their value following a negative statement about their earnings or business prospects. Futures markets, such as corn, soybeans, or gold, however, hadn't experienced such massive volatility despite their historically low margin requirements. Futures trading was no longer seen as the ultimate speculative venture in financial trading. I The Birth of Universal Stock Futures These events and conditions opened the door to a new and promising union of stocks and futures. The introduction of stock index futures in the early 1980s was merely a sign of things to come. The start of trading in Universal Stock Futures (USFs) by the London International Financial Futures Exchange (LIFFE) in 1998 was a near-perfect marriage of two distinctly different financial vehicles. For the first time ever, stock investors and traders could take positions in futures on individual securities (as opposed to an all- inclusive stock index such as the Standard and Poor's 500 (S&P 500) or the Financial Times Stock Exchange 100 index (FTSE 100). And the prospect of doing so on margin as low as 20 percent sweetened the dowry for USFs. Although the cost of buying 100 shares of IBM at 50 percent margin might be $5,000 (with IBM at $100/share), the ability to "own" 100 shares of IBM in a futures contract for a margin of $1,000 or even less has opened a world of vast new possibilities to stock and futures traders. Some market experts feared that the ability to trade futures on stocks would reduce investors' incentive to own stocks. Others, however, correctly reasoned that ultimately the increase in market participants would add liquidity, volume, and numerous new strategies to the markets, thereby enhancing the risk-transfer process and with it the overall functioning of financial processes. This has in fact been the case, particularly in the securities futures markets for Italian and Spanish stocks, where trading volume has been very large. The Nasdaq exchange in New York and the LIFFE exchange in London formed a joint venture known as the NQLX, to trade Single Stock Futures (SSFs). The primary SSF market is based in Chicago at the OneChicago Exchange. The following SSFs were listed for trading on the NQLX market: GICS Group Advanced Micro Devices American International Group Amgen Inc. AOL Time Warner Applied Materials AT&T Corp. Bank of America Corp. Bristol-Myers Squibb Brocade Communications System ChevronTexaco Cisco Systems Inc. Citigroup Inc. Coca-Cola Co. Dell Computer Corp. xvi Introduction eBay EMC Corp./ Massachusetts Exxon Mobil Corp. Ford Motor Co. General Electric General Motors (GM) Home Depot Honeywell International Inc. IBM Intel Corp. Johnson & Johnson JP Morgan Chase & Co. Juniper Networks Inc. Merck & Co. Merrill Lynch & Co. Inc. Micron Technology Inc. Microsoft Corp. Morgan Stanley Dean Witter & Co. Oracle Corp. PepsiCo Inc. Pfizer Inc. Procter & Gamble (PG) Qualcomm Inc. SBC Communications Inc. Siebel Systems Inc. Sun Microsystems Inc. Texas Instruments Inc. Veritas Software Corp. Verizon Communications Inc. Wal-Mart Stores Inc. Walt Disney Co. preferred stock ~ foreign exchange currency trading |
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