US single-stock futures venture lists more tradeable indexes

OneChicago, a joint venture of the three main Chicago derivatives exchanges formed in May 2001 to offer an electronic market for stock futures products in the US, has added seven 'narrow-based' equity indexes to an original eight it unveiled in March.

Narrow-based indexes contain four to five synthetic equities in single futures, allowing investors to express positive or negative views on those stocks together or taken as a proxy for the larger industrial sector of which they are a part. The new banks index future, for example, contains exposure to Bank One, SunTrust, Wachovia and Wells Fargo. The other indexes cover drugs, gold extraction, computer networking, pharmacies, semiconductors and software.

Like single-stock futures on individual stocks, narrow-based indexes could appeal to investors looking to take quick, leveraged long or short positions on US economic sectors. The margin requirement for US stock futures is 20%, and there is no rule prohibiting shorting a stock in falling markets, such as that which has frustrated the trading activities of market bears on the New York Stock Exchange.

As with any new exchange-traded derivative, the test for US stock futures will be whether liquidity will build up quickly enough to attract investors who trade in size. Trading large positions in relatively illiquid markets is expensive.

According to OneChicago, constituents in the indexes were selected for their correlation to the wider industrial sector equity indexes of which they may be a part.

OneChicago also considered whether at least one of the constituents in an index could meet requirements to become listed as individual single-stock futures. This is important to the exchange as it sees strong demand from investors to trade at least one constituent of an index, say a future on Bank One, against the index itself. This variant of pairs trading would involve a bet that a company would rise or fall in value against other peers in its sector. Not all the announced narrow-based indexes as yet have listed futures for any of their constituent elements. That will come later, said a OneChicago official.

The original eight OneChicago indexes were airlines, biotechs, computers, defence, investment banking, oil services, retail and semiconductor components.

OneChicago may still add as many as five more narrow-based indexes by the time US stock futures trading through OneChicago start trading in October. Final US regulations concerning stock futures trading do not become effective until September 13.

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