Volume on Eurex’s single stock futures (SSFs) long ago passed Spain’s MEFF exchange and this year is running ahead of Euronext.Liffe — despite Euronext.Liffe launching its SSFs in 2001, while Eurex didn’t get going until fall 2005.
Eurex traded 22 million SSFs contracts in the first four months of this year, up 66% over 2006.
Product strategy boss Brendan Bradley credits the success in part to the exchange’s ability to offer cross-margining on SSFs, equity options, and options and futures on a wide range of broad and narrow equity indexes. Euronext.Liffe offers cross-margining, but has a smaller product range.
Dividend plays provided the growth early on, as traders used SSFs to capture dividend-associated price rises while avoiding taxes on dividends themselves. Such plays make sense in Europe, which is plagued by regulatory quirks. Many countries still have wildly differing tax regimes, and Spain even has a mandatory cap on the number of Spanish shares fund managers from all countries can own.
It is that Spanish limitation that initially drove MEFF to the top spot on the European SSF pyramid — and both Eurex and Euronext.Liffe benefit by offering Spanish SSFs on their platforms.
The SSFs also have begun to gain volume from spread activities — most notably from a strategy dubbed “130-30,” to reflect the tendency of fund managers looking to market a primarily long strategy to investors unfamiliar with alternative investments.
Such managers often will have a market position defined as being 100% long in a given sector, and SSFs enable them to put on a long position equal to 130% of their weighting in one share while going short 30% in another.
Eurex recently launched 16 dollar-denominated SSFs on Russian shares, and starting in May, is set to launch 20 sterling-denominated SSFs on U.K. shares — bringing the total number of SSFs on Eurex above 400.
So far, the bulk of the business is coming via large block trades and not via the order book. Thus volumes have not yet led to a truly liquid market — a prerequisite for trades that would enable investors to use SSFs to build delta hedges against options positions.
