The view of FCMs on bitcoin futures vary from excitement to cautious optimism to extreme skepticism. To a man, they all will offer these instruments to their customers, once approved, though some have significant apprehension.
“Bitcoin is like any other new commodity, if our customers choose to trade it, as a clearing firm we will trade it,” Kadlec says. He is encouraged that it is being offered at CME and Cboe Futures Exchange because they have the wherewithal to support a new contract, but adds, ADM Investor Services will not be first to market. “As a traditional FCM that caters to hedgers we are not going to be early adopters of bitcoin [futures]. My concerns are standard: What’s the bid/ask? Is it a transparent market? How’s the liquidity? Is it a fair market? That is why it will have to be the Cboe or CME.”
“We see this as a tremendous opportunity, not just for us but for the industry in general,” Lamaina says. “Bitcoin over the last two months has doubled in price. And there is more than just bitcoin, there are plenty of other cryptocurrencies, there are over 1,000. Most people focus on the granddaddy of all, bitcoin, but we view this as a potentially huge opportunity. It is something that we are looking to support and provide our customers access to bitcoin futures at both the CFE and CME.”
Lamaina acknowledges that there are still a fair amount of unknowns in the regulatory environment, especially when it comes to owning and transacting in the underlying.
Corcoran is apprensive about bitcoin futures and will not offer them to customers on day one. “We agree with much of the substance of Tom Peterffy’s recent letter to the CFTC that the product needs to be closely examined. I do have fears that it is so unknown and volatile,” he says.
Perhaps more skeptical is Guinan. “We have had several clients inquire about the cryptocurrencies. Advantage will offer access as we do with other exchange listed products,” He says, while cautioning, “I think strong leadership at the Federal Reserve or Treasury Department should be aggressively thwarting these products, and yet they are not. The era is reminiscent of the dot-com run-up in some concerning ways. While there are infinite possibilities for more cryptocurrencies, the run-up in price of any particular one, as it gains popularity, is much more representative of a speculative vehicle than an instrument for paying for transactions across the globe.”
Throwing more cold water on the bitcoin futures buzz was a letter Interactive Brokers Chairman Thomas Peterffy sent to CFTC Chair Christopher Giancarlo in mid-November where Peterffy called for any cryptocurrency futures to be placed in a separate clearing pool from the rest of the products in an exchange clearinghouse. “There is no fundamental basis for valuation of bitcoin and other cryptocurrencies, and they may assume any price from one day to the next. This has been illustrated quite clearly in 2017 as the price of bitcoin has increased by nearly 1,000%,” Peterffy wrote. “Cryptocurrencies do not have a mature, regulated and tested underlying market. The products and their markets have existed for fewer than 10 years and bear little, if any, relationship to any economic circumstance or reality in the real world.”
He goes on to say the only way to protect clearing organizations, their members and the financial system as a whole from this unique risk is to isolate cryptocurrencies derivatives from other products. “Margining such a product in a reasonable manner is impossible. While the buyer (the long side) of a cryptocurrency futures contract or call option could be required to put up 100% of the value to ensure safety, determining the margin requirement for the seller (the short side) is impossible.”
While several people have pointed out concerns, no other new product in recent years has created so much buzz.
“The last product that had as much fanfare as bitcoin has was single-stock futures, and it just didn’t happen,” Corcoran says.
Lamaina points out there is a great deal of enthusiasm for bitcoin futures. “The amount of customers requesting this is relatively moderate; however, the people who are contacting us about it are extremely passionate. Comparing that to other products that are coming out, the amount of customer enthusiasm is much greater than any other product we have seen in recent history. This indicates to us that we are going to have quite a few customers who are going to want to trade early on.”
“My gut feeling is that bitcoin is going to start out with a retail flare, but we need to approach with caution rather than rush it to market” Corcoran says. “My friends who are entrepreneurs all own some bitcoin. The younger generation, I don’t think they understand it, but they want to be in it.”
Kadlec is content to wait. “The reason why you want to pay attention to bitcoin is [it may] become a form of payment for our core customers. It could because it could be a dollar substitute and we have an international presence.”
Since ADM Investor Services has international customers, if bitcoin becomes an actual currency those customers may eventually use it, and need to hedge it. “We do a fair amount of business in emerging markets and emerging markets don’t have the strength of a federal reserve system and a top tier banking system,” Kadlec says. “Our customers are more methodical and strategic and use this marketplace for the traditional economic purpose, which is to hedge. We will use the marketplace once it hits our rather pragmatic view of using tools.”
While there is risk, brokers are in the risk management business. “Everyone has been asking for volatility, well we have a product that is going to potentially have some volatility to it so let’s try and figure out what the proper margin requirements are so it is not overly onerous, but at the same time, the FCMS are able to protect everyone from a tremendous move,” Lamaina says.
Risk & Opportunity
In accessing risks and opportunities, futures brokers are focusing on what has allowed them to survive in a difficult environment.
“We need markets that are liquid, deep, transparent and smartly regulated – that allow clients to trade and hedge in a cost-effective manner,” Gordon says. The biggest risks to FCMs are those things that could negatively impact these qualities, including rising costs with a limited ability to offset them and unreasonable regulatory hurdles that don’t solve a problem or protect the customer.”
While the ZIRP period seemed like it would never end, it has, but there are new challenges. “Many markets have had extremely low volatility for a considerable period of time,” Guinan says. “This depressed volatility may be like compressing a spring and some markets may erupt with unexpected moves resulting in significant profits or losses for clients. FCMs need to be vigilant.”
Exciting new products hold out hope, but also include risk, especially cryptocurrency futures. “Cryptocurrency futures are the biggest opportunity we have seen in a long time,” Lamaina says. “As these products expand, we see opportunities in retail with outright futures and futures on options.”
Kadlec says the key for survival in a continually challenging environment is efficiency. “How can you do more with less? Making personnel smarter; being able to do more transactions with less in an incredibly accurate way.”
What is clear is that today’s FCMs are equipped to compete in the new post-credit crisis world. What lay ahead are both greater challenges and opportunities.