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   Strategies & Market TrendsThe Final Frontier - Online Remote Trading

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To: Jon Tara who wrote (8750)2/15/2001 12:18:54 AM
From: LPS5
   of 12617
I met with someone a few months back who explained to me that, for the retail end of the market, weather contracts could be used to hedge against the risk of financial loss to holders of an outdoor wedding - for example - in the event of rain (which might lead to losing deposits, damage to rented tuxes, etc). Or, for those in those "big square states" out west, losses due to tornados and such could be hedged some extent.

I wonder what the insurance/reinsurance industries will do to address the potent threat that such contracts present (if indeed they prove threatening). Possibly issue their own contracts or address the new market with OTC weather derivatives along the lines of swaps, etc.?


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To: Jon Tara who wrote (8750)2/15/2001 8:44:29 AM
From: TFF
   of 12617
Futures have amazingly low performance bond rates. But more importantly the quick pace of change is making futures far more attract than stocks for short term trading. Some things happening include:

Demutualization of futures exchanges

creation of electronic markets (globex, a/c/e, etc)

Proliferation of direct access platforms(ISVs')

Simplified execution.

High volume/highly volatile contracts.

rapidly falling commission rates

creation of many new contracts such as individual stocks, stock sectors, indices, etc.

Should make for interesting times ahead.

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To: TFF who wrote (8752)2/15/2001 12:58:38 PM
From: Jon Tara
   of 12617
What is a low performance bond rate? Is this something you get from one of those guys with all-night offices across from the court house? :)

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To: Jon Tara who wrote (8753)2/15/2001 1:23:26 PM
From: TFF
   of 12617
LOL . No performance bond rates are the semi-equivalent to margin on stocks: Here are the requirements for the CME for example:

CME Performance Bond Rates

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To: LPS5 who wrote (8751)2/15/2001 7:41:58 PM
From: OX
   of 12617
I'm aware of the xDD contracts that have been trading at the CME for awhile
(what is it a year or 2 now--time flies),
but do you know where the "rain" contracts are trading?

I looked over the enron site and it alludes to them, but only mentions the xDD contracts
in any detail. perhaps enron have their own products (??)

fascinating stuff


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To: OX who wrote (8755)2/15/2001 7:50:58 PM
From: LPS5
   of 12617

Sorry, no idea. They might be pending or even conceptual at this point, but a derivatives salesperson explaining the institutional applications to me recently gave the wedding example when I asked, out of curiosity, if there were retail applications as well.

I'll post any other qualitative information that I come across -


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To: LPS5 who wrote (8756)2/15/2001 9:45:40 PM
From: OX
   of 12617
tx for your reply <e>

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To: TFF who started this subject2/16/2001 7:34:09 AM
From: supertip
   of 12617
Amid Weak Trading, Schwab May Miss 1st-Quarter Estimates

Charles Schwab Corp., with its stock-trading activity declining in January and worsening in February, said Thursday that it might have trouble meeting Wall Street's expectations for the current quarter.

The leading online brokerage firm reported average daily volume for January was 222,200 trades, down 5% from December and down 26% from a year earlier.

And trading figures so far in February are even weaker. Schwab said average daily trades have slipped 18% to about 182,000 in the current month.

Christopher Dodds, Schwab's chief financial officer, said it is too early in the first quarter to give specific guidance, but with trading volume softening more than expected, Schwab might have difficulty meeting its earnings estimates.

"In this type of trading environment, I would be of the mind that achieving the current consensus will be difficult," Mr. Dodds said.

Schwab's report prompted Richard Repetto, an electronic-brokerage analyst for Putnam Lovell in New York, to lower his estimates by one cent. He now expects the company to post a profit of 13 cents for the quarter.

Mr. Repetto said he had expected trading activity by Schwab customers to increase by about 10% in January and 5% in February and March. Because the company's revenue largely depends on commission revenue -- it accounted for 37% of total revenue in the quarter ending Dec. 31 -- Mr. Repetto said Schwab's difficulty in meeting those targets would affect its bottom line.

Analysts had expected Schwab to report a profit of 15 cents a share for the first quarter ending in March, down 35% from 23 cents a share in the year-earlier period, according to First Call/Thomson Financial. The firm earned 11 cents a share for the fourth quarter ending Dec. 31.

Earlier this month, Datek Online Brokerage, a unit of closely held Datek Online Holdings Corp., said its daily trades in January were up 5% to 117,695 from December and Ameritrade Holding Corp. reported average daily trading activity was up 14% from December to 131,000.

But Datek also indicated this week it is averaging fewer than 100,000 trades per day so far this month, down 15% from January.

In reporting its earnings Wednesday, TD Waterhouse Group Inc. said its average daily trading volume for January was down about 6% from December. Like Schwab, TD Waterhouse caters more to buy-and-hold investors.

Account growth at Schwab remained on target, however. Schwab reported opening 100,000 new accounts with $12.5 billion in assets.

Online brokerage firms have been hit by the lackluster market, which has left more casual investors on the sidelines, hoping they can wait out the downturn.

But early figures from February show that despite the interest-rate cut last month and Federal Reserve Chairman Alan Greenspan's comments Tuesday, when he played down the risk of a recession, there is little to entice investors to enter the market.

In recent weeks, Schwab has taken a number of cost-control measures to weather the market conditions, including instituting a hiring freeze, reducing the salaries of top executives and asking employees to take unpaid furloughs.

The company said Thursday it remains focused on managing its expenses, and added the measures have produced savings for the firm. For example, it said the hiring restrictions have resulted in a decline in full-time employees, down 500 to 25,800 at the end of January.

Mr. Dodds said the company continues to evaluate its spending, with advertising and brand-development investments now on the table.

"We'll be looking at all those things while balancing the importance of innovation and enhancing our long term competitiveness," he said.

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To: LPS5 who wrote (8756)2/18/2001 10:32:35 AM
From: TFF
   of 12617
The Future of Currency Futures: Tradition and E-Trading To Try Life Side-by-Side At CME

By Christopher Faille, Reporter
02/13/2001 10:27:45 AM ET

Rye, NY (—The Chicago Mercantile Exchange announced Feb. 8 that it will extend electronic trading hours for its currency and cross-rate futures contracts, effective April 2, so electronic trading will proceed side-by-side with its open outcry counterpart.

At present, currency futures trade after hours from 2:30 p.m. to 7:05 a.m. (Central Time) on the GLOBEX2 system. Under the plan, they will trade on that system for 23.5 hours a day, from 2:30 p.m. to 2:00 p.m., except on Sundays, when electronic trading will not begin until 5:30 p.m.

The CME will place additional GLOBEX2 workstations near the currency pits and will make GALAX-C hand-held units available to traders who request them.

The CME’s demutualization documents, made public last year, state that open outcry in any market will continue so long as the open outcry portion of that market is liquid, defined as involving at least 30% of average daily volume in that market and 30% of its open interest.

“In the broadest possible terms,” said spokesman William Burks, “the exchange is trying to position itself so that whatever the customer wants is what we provide.”

Currency futures have been traded at the CME by open outcry for nearly 30 years. In August 1971, President Nixon ordered an end to the policy of gold redemption. In the jargon of the time, he “closed the gold window” that had been left open for foreign governments under the Bretton Woods fixed-exchange-rate system. This created precisely the sort of uncertainties that financial markets are best at addressing.

Just nine months passed between Mr. Nixon’s order and the institution, in May 1972, of currency futures, the world’s first financial derivative product, at the Chicago Mercantile Exchange.

In the first full year of such trading, 1973, volume was a mere 436,374 contracts. One has to multiply that volume by 44 to get the Y2K volume of 19.3 million contracts.

Separately, on Thursday, the CME reported a net loss for the year 2000 of $5.9 million, compared with a 1999 net income of $2.7 million. Management attributed the loss to major investments in technology, and substantial nonrecurring expenses associated with CME’s transition into a shareholder-owned, for-profit corporation.

The CME reported record annual volume of 231.1 million contracts, representing an underlying value of $155 trillion, nearly 15% of that volume traded on the GLOBEX2 system.

“In 2001, we will focus on product development, improvements to our electronic and floor-based trading technologies, and continued re-engineering of our processes to capture cost efficiencies for the exchange and our customers,” said Jim McNulty, president of the CME.

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To: TFF who started this subject2/20/2001 11:22:31 AM
From: TFF
   of 12617
On the Table, A Bigger Risk For Investors

By Jerry Knight
Sunday, October 1, 2000; Page H01

Buried in a bill that's buried under the pile of legislation Congress is trying to clear off before it goes into reelection mode is a provision that would give gutsy investors a whole new game to play.

It would permit trading in futures contracts on individual stocks, an idea that's been kicking around Washington, Wall Street and the Chicago futures markets for 18 years. Futures contracts are obligations to buy or sell something at a set point in the future and at a set price.

Trading futures contracts on stock market indexes has become so much a part of the fabric of the markets that on weekday mornings the radio and TV tell us what's happening to the Standard & Poor's 500-stock index's futures. But futures on individual stocks have been forbidden by federal law.

Investors may not understand how the machinery works, but they know the S&P futures provide a preview of what's likely to happen when trading opens on Wall Street.

The same role could be played by individual stock futures, if Congress can get its act together and pass the measure before the members go home to protect their seats.

Last Friday, for example, investors could have seen Apple Computer stock falling if there had been futures contracts traded on Apple's stock, because the futures markets open well before the stock market. Apple shares lost roughly half their value in half an hour after the Nasdaq Stock Market opened Friday morning because the company warned that its fourth-quarter earnings would be far less than analysts had been expecting.

As it was, the only warning of how fast Apple would fall came from after-hours stock trading, which is often not a very accurate predictor of what's to come the following morning.

A market in individual stock futures, in fact, not only would have shown how far the Apple was falling from the tree, it might have made it possible for Apple shareholders to mitigate some of their losses. They could have protected themselves by selling Apple futures before the stock market opened.

And assuming there were futures not only for Apple but also for other prominent personal-computer stocks, investors might have been able to keep the rotten Apple from spoiling the whole barrel. The stocks of Intel, Microsoft, Dell and Sun all were soured by Apple.

But there is no trading now in Apple stock futures or any others.

Part of the reason is that the stock markets have been lobbying ferociously to maintain the federal ban on trading futures on individual stocks--divining the "right" price for each individual stock is, after all, why stock exchanges exist in the first place. The federal ban on individual stock futures was written when Congress set regulatory standards for stock index futures in 1982.

Trading futures on single stocks is a concept that is difficult to understand. In fact, it might not even work. This kind of contract has never been tried in any place with a serious stock market. If you saw a list of where individual stock futures are traded, your first question would be: They have a stock market? Would you believe Budapest?

Another part of the reason is that federal regulation of financial services has traditionally been based on the premise that if the government doesn't specifically permit something, you can't do it.

But now there is proposed legislation that would permit trading futures contracts on individual stocks. That is not the primary purpose of the bill. Its main goal is to clear up arcane legal questions about regulation of far more complex and esoteric financial transactions that are used by multinational banks and global corporations. It would settle long-standing turf battles between the Securities and Exchange Commission, which regulates stocks, and the Commodity Futures Trading Commission, which regulates futures.

Late Friday, congressional leaders and industry lobbyists were trying to cut deals to bring up a vote soon on what is known as the Commodity Futures Modernization Act of 2000.

In reality, it's not an act but a drama in four acts, with three different versions coming out of three different House committees and a fourth emanating from the Senate. As always, the devil is in the details, the little phrases that can mean millions to specific companies, billions to influential industries. Needless to say, no one is representing individual investors in these talks.

The basic principle involved is not a partisan issue. The Clinton administration is for it. The Democratic chairmen of both the SEC and CFTC are on board, as are the Republican chairmen of all the key congressional committees--Agriculture, Banking and Commerce. Federal Reserve Board Chairman Alan Greenspan, widely respected as an intellectual force on such matters, is a backer.

The New York Stock Exchange is leading the opposition, backed by the Nasdaq Stock Market and the various options exchanges. The Chicago Board of Trade, the Chicago Mercantile Exchange, the Futures Industry Association, the big banks and the big Wall Street firms are the principal proponents.

Campaign coffers are overflowing with checks, metaphorically paper-clipped to a memo explaining where the donor stands on these issues.

What's fascinating about the policy debate is the agreement on the guiding principle: The government should not stand in the way of financial innovation.

John Damgard, president of the Futures Industry Association, says it best: "Let the marketplace decide whether these are good products, not some GS-13."

Sorry 'bout that, bureaucrats, but that's the thinking these days.

Two other factors are driving the legislation: internationalization and technology.

The world has turned into one big market. Billions of dollars worth of yen, marks and pounds are traded in the United States every day. The London futures markets threatened to turn the tables on us a couple of weeks ago by announcing plans to trade futures on individual U.S. stocks. Nobody could have handed the American advocates a better weapon to wave in front of Congress.

In fact, international trading is easy with today's technology. The pits where agricultural futures are traded in Chicago and the equally fabled floor of the New York Stock Exchange are not going to get the stock futures business. They'll be traded electronically in a system modeled on the Nasdaq market.

The Chicago Mercantile Exchange has already established the model with a special version of its S&P 500 contract that was created for individual investors.

The S&P futures contract is far and away the world's most successful stock index vehicle. It is traded in quarterly cycles that are settled based on where the S&P ends up on the last trading day in March, June, September and December. The next contract coming due--right now, that's December--is where the action is. As of Friday, there were about 390,000 December contracts outstanding.

The big appeal of futures contracts is that traders do not have to pay the full value upfront, or even come up with the 50 percent margin required to buy stocks on credit. Instead they make a small down payment--also known as margin--that typically is 5 percent to 10 percent of the value of the contract.

That creates tremendous leverage. If a stock jumps 50 percent in value, the profit can be several times the amount invested. But the lever moves in both directions. If the value of the contract plunges, the trader not only loses the down payment but also must cover the full amount of the loss.

The bustling pits still trade the original S&P index futures contract, which represents $250 multiplied by the actual index. That's a wholesale-size contract, designed to serve the needs of institutions. On a day like Friday, when the S&P was down 21.78 points, the contract lost $5,445.

To attract individual traders, the Merc created an S&P "mini" contract that is valued at $50 times the index. Its moves are still hefty but more affordable; it dropped $1,089 on Friday.

The S&P mini is traded electronically and has attracted growing interest from online traders. Instead of sitting at their home computers trading one stock, they try to outguess the whole market by buying and selling the mini S&P, which had more than 31,000 contracts outstanding as of Friday.

The same kind of two-tiered market is expected to evolve for single stock futures.

There will probably be a "maxi" contract for institutions such as mutual funds, which will use it to manage their portfolios. When they think a stock is likely to fall, they can sell stock futures contracts and lock in the price without actually unloading the shares, which might drive down the market.

Officials at the Chicago Mercantile Exchange consider details of upcoming contracts a trade secret. But they make it very clear that if the government gives the green light, they will create contracts tailored to small traders. Most likely it will be 100 shares--the stock market's standard "round lot"--and it will be set up specifically to encourage online day trading.

Now, of course, day-trading stocks--popular as it may have become--has proved to be the riskiest business that small investors can get into. Even with a 50 percent down payment on stocks, traders can be wiped out in a single day.

That happened Friday to shareholders in Apple. On Thursday, Apple stock closed at $53.50 a share. It opened the next morning around $28 and soon slid to $25.75. Investors holding fully margined Apple shares were broke by the time the stock fell below $26.50.

But anyone who had purchased an imaginary Apple stock futures contract--locking in the obligation to buy the stock at a now-higher-than-market price--would have been in even deeper doo-doo. When the market opened at $28, such a buyer would probably have already lost the entire down payment and would have had to come with additional cash to cover the rest of the loss.

In the days before deregulation, a lot of people would have argued that investors should be protected from such big risks, but those days are over.

© 2000 The Washington Post Company


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