The Exchanges' Greatest Hits of 1996
Many of last year's most successful new contracts rode
the equity bull market to success. Others succeeded on their own charms.
By Karen Spinner
1996 will not be remembered as a banner year for new, innovative exchange-traded
contracts. For the major exchanges, in fact, 1996 was what they euphemistically
call a "building year."
In Europe, preparations for the European Monetary Union dominated the
agenda. Exchanges concerned themselves with how contracts denominated in
the Deutsche mark and other likely EMU currencies should settle, and how
European interest rate and currency contracts will fare given the probable
convergence among euro rates and currencies and the resulting decline in
demand. These issues also had an effect on U.S. exchanges such as the Philadelphia
Stock Exchange and the New York Cotton Exchange's financial subsidiary FINEX,
both of which emphasize currency contracts.
Meanwhile, other U.S.-based exchanges encountered a variety of regulatory
hurdles to releasing new, structured products. The Securities and Exchange
Commission and the Commodities Futures Trading Commission continued to keep
a tight rein over what they see as new "derivative" products and
related risks. "I think one reason we didn't see a lot of new offerings
last year is that the markets are already well-served by existing contracts,"
notes one head of product development for a major exchange. "It's getting
harder and harder now to come out with the next 'latest and greatest' thing."
Still, there were some strong contenders in the 1996 exchange contract
playoffs. Equity indices and sector-specific products-such as options and
futures on technology and emerging market indices-rode the current bull
market to high trading volume and open interest. Demand for such products
has been strong from both retail and institutional investors looking to
hedge the gains they've made during the past two years. This demand has
also led to a proliferation of options and futures on single, highly popular
stocks. Also, a few highly specific niche products have emerged, serving
a variety of special interests.
The best way to measure success is with a quantitative measure-consistently
high or rapidly growing trade volume and open interest. Qualitatively, success
can be defined as contracts that may be particularly significant in the
context of recent market events.
We asked the exchanges to select their own picks for the "most successful
contracts of '96," and they complied. Some also provided insight into
why 1996 was, for them, more of a time for consolidation than for new, sweeping
The big news at the Chicago Mercantile Exchange this year, according
to Rick Redding, vice president of marketing and product development for
equity indices, was the introduction of futures on the NASDAQ 100 index.
"Options have existed on the NASDAQ 100 for the past two years, and
they have been popular for institutional investors who want to hedge their
exposure," he says. "One effect of the option's popularity was
that the market-makers, who track these options, needed someplace to lay
off their risk. They've been asking for the product for quite a while now."
Trading began on April 10; it quickly became the second-fastest growing
future on an index ever released at the CME. (The fastest growing index
future was on the S&P 500.) As of September 20, six months after the
contract had commenced trading, open interest rose to 11,457 contracts,
a significant milestone in a new contracts development. The NASDAQ futures
contract was also popular with institutional investors who wanted to hedge
hot stocks like Microsoft and Intel.
The contract sailed through its regulatory approvals. It had been in
development for more than a year; the biggest issue for CME marketers was
timing the launch properly to get the biggest bang for its buck. After interviewing
market-makers and customers, Redding and his team concluded that mid-year
1996 would be an auspicious time. "The options were gaining in popularity
because, as the bull market continues, there are also concerns about the
level of the market. Therefore, we thought it made sense to bring in this
new futures contract while demand for options was still accelerating, allowing
us to take advantage of pent-up demand on the part of the market-makers."
Another notable contract to come from the CME in 1996 was the euro/yen
futures contract, available through SIMEX, which is also covered by the
CME's and SIMEX's mutual offset agreement. This means that customers can
use the same back office and settlement procedures for the euro/yen contracts
that they use for other CME contracts. Customers also have the choice of
having margin requirements administered by either SIMEX or the CME. Although
the contract hasn't shown dramatic volume numbers, it is, according to most
market players, more successful than a comparable euro/yen contract available
through LIFFE and the Tokyo exchange. Issued on March 6, 1996, the Merc's
euro/yen contract reached an open interest of 10,301 on April 7 of the same
According to Peter Barker, a vice president for produce development with
the CME, the euro/yen contract has been relatively successful primarily
because it is inexpensive and easy to trade. "The euro/yen is a simple,
three-month interest rate contract, just like our Eurodollar offerings,"
he explains. "We think users like the contract because of its simplicity.
The mutual offset agreement with SIMEX has been around for years, and users
are familiar with how it works."
Barker adds that some customers prefer a contract offered via SIMEX over
an identical contract offered through the Tokyo exchange because SIMEX's
transaction fees are substantially lower. The CME launched the contract
as soon as it received regulatory approval. "It probably would have
worked no matter when we brought it out," says Barker. "When you
see more volatility in the market, I think we'll really see this contract
At the Marche a Terme International de France (MATIF), concern over the
coming EMU went a long way toward putting a damper on new development. According
to Louis de Rouge, the New York-based U.S. representative for MATIF, "In
terms of new products, there was very little activity last year. We did
release a eurowheat contract and options on sugar contracts, but so far
those two have gotten off to a slow start. Primarily, our goal for 1996
was to begin addressing EMU, and its implications for both new and outstanding
contracts." One new development in 1996 was the modification of contract
notional amounts and settlement procedures to account for the possibility
of EMU. Another part of MATIF's long-term response to EMU was to sign a
five-year accord with the Chicago Mercantile Exchange to allow MATIF's medium-
and long-term interest rate contracts to trade on the Merc's GLOBEX system
after 6 p.m. Chicago time.
The London International Financial Futures and Options Exchange (LIFFE)
spent a great deal of time during 1996 preparing a long-term strategy for
coping with EMU and handling the administrative loose ends resulting from
its recent merger with the London Commodity Exchange. "We have focused
primarily on researching the ramifications of EMU," says Caroline Denton,
a spokesperson for the exchange. Already, LIFFE has modified the settlement
terms of its three-month euro/mark contracts maturing in 1999 to settle
in the euro in case EMU has begun by the time the contracts mature.
Denton explains that LIFFE's eventual goal is to become the premier trading
center for "euroderivatives," and the exchange is currently pursuing
a four-part strategy to review and enhance its range of contracts for the
new environment, reinforce the strengths of its trading platform, build
a network of strategic alliances with other exchanges and bolster its position
as a well-regulated exchange with high standards. In addition to modifying
three-month euro/mark contracts to account for EMU, the exchange also introduced
one-month euro/mark futures last year, in order to provide investors with
the short end of the Deutsche mark yield curve. According to Denton, "As
longer-term interest rates become more correlated in response to EMU, there
will be an increase in trading on the shorter end of the yield curve."
LIFFE used its relationship with the Tokyo International Financial Futures
Exchange (TIFFE) to begin offering three month euro/yen contracts in 1996.
Although the exchange has captured a reasonable volume in a relatively nonvolatile
market, it competes directly with the more popular U.S.-based CME contract
offered through SIMEX.
LIFFE has also been actively researching how EMU may influence its bond
futures contracts. "We have more time on the bonds, because contracts
maturing in 1999 will not be listed out until 1998," says Denton. "The
big question here is whether investors will perceive a difference in credit
risk in bonds issued by two different EMU governments. While there should
be no currency risk, there could well be credit and liquidity differences
between different issues."
LIFFE, however, is optimistic over the long haul. Says Denton, "Potentially,
the euro could one day be as strong as the dollar and the yen. LIFFE regards
EMU as both an opportunity and a challenge, because whichever exchange manages
to capture the market for euro futures and options will be in an excellent
position to be a true market leader."
Despite exchange-related turmoil over the euro, New York-based FINEX,
the financial division of the New York Cotton Exchange, is enjoying unprecedented
success in the European cross-currency market. One of the most successful
contracts listed by FINEX in 1996 was a mark/Swedish krona cross-rate future,
issued in February 1996. According to Charles Minnaar, FINEX's executive
vice president in charge of marketing, this contract simply represents part
of the exchange's ongoing strategy of emphasizing the cross-rate niche.
"Unlike other exchanges, we include interbank broker prices in addition
to trading floor prices in our contracts," he says. "We believe
it is important to encourage cross fertilization between the exchange and
the interbank market. They are complementary, not competitive in our view."
On December 9, 1996, FINEX experienced a record volume of 13,053 currency
contracts traded over a single day.
Minnaar adds that the mark/krona contract is the first futures contract
of its kind, and provides a new outlet for money managers and other futures
traders both to hedge subsidiary currency risk and to take on additional
exposure to the krona, should they so desire. Is the FINEX concerned that
the impending EMU could take a bite of the exchange's profitable cross-rate
strategy? "According to conventional wisdom, cross rates will become
irrelevant as soon as EMU hits," he says. "However, we believe
there will be many currencies, such as sterling, lira, peseta, krona and
the yen, that will not immediately, if ever, be part of EMU. We are developing
a yen/euro contract to replace mark/yen, a euro/lira contract to replace
mark/lira and so on. We still think our cross-rate strategy can work, even
Likewise, the New York Futures Exchange-another part of the New York
Cotton Exchange-released a futures contract on the PSE Technology Stock
Index last April that is still doing well. This index has been successful
primarily because the bull market in equities-and in tech stocks in particular-has
continued unabated for the past couple of years. This particularly suits
smaller investors because it is sold in smaller increments than indices
on the other exchanges.
The American Stock Exchange has rode the equity bull market to one of
its best years ever. According to Joseph Stefanelli, executive vice president
of derivative securities, "We have seen tremendous volume in both our
WEBS and SPDRS (S&P depository receipts) products." WEBS-otherwise
known as world equity benchmark shares-were issued in 1996 in conjunction
with Morgan Stanley, which is actually underwriting the WEBS; average daily
volume in WEBS is now worth $50,533,500. While SPDRS are offered on the
S&P 500 and the mid-cap S&P 400 indices, WEBS give investors exposure
to 17 countries represented in the index. "WEBS, like SPDRS, are extremely
flexible," says Stefanelli. "Investors can enter and exit the
market more easily." He adds that WEBS are particularly attractive
to institutional investors and money managers who cannot use futures contracts
because of investment guidelines.
Last year the AMEX also enjoyed great success in bringing out flex options
on a variety of well-capitalized, liquid individual stocks. "Equity
options," says Stefanelli, "were up 17 percent in 1996. The demand
for options has become higher as investors seek to protect their returns
from the past two years." Flex options are attractive to institutional
investors who want to custom-tailor an option to protect concentrated holdings
of a particular stock. They are particularly appealing to some because they
can be easier to unwind than similar OTC options. The only stumbling block,
Stefanelli says, is that the SEC has imposed position limits for options
on individual equities. "The SEC is concerned that options can be used
to manipulate stock prices," he explains. "However, we are in
negotiations to remove these limits for some flex options. This should do
a lot to increase institutional trading volume."
The Chicago Board Options Exchange also had a good experience with new
contracts, courtesy of the equity bull market. According to Bill Barclay,
the exchange's vice president of marketing and strategy, "We have added
more than 200 options on individual equities and long-term equity anticipation
securities in 1996. It has been a very good year in general for equity options."
And for the CBOE, 1996 has been the best year ever for equity options.
One product released in 1996 that has just begun to develop a substantial
following is the NASDAQ flex option, which, according to Barclay, is of
great interest to institutional investors who want to hedge their exposure
to the NASDAQ composite. Other products that did well in 1996 were options
on proprietary Goldman Sachs technology indices, a natural match with the
market's current and seemingly insatiable appetite for high-tech stocks.
Another successful product released in 1996 is the S&P 500 index-linked
structured note, issued by Smith Barney. These structured products give
smaller investors the opportunity to gain exposure to the S&P 500 index
without buying in large quantities. They also protect investors' principal
In the future-or at least for 1997-Barclay predicts a greater appetite
for options on American depository receipts (or foreign stocks listed on
U.S. exchanges) both for individual and institutional investors who have
increased their exposure to foreign markets.
The Philadelphia Stock Exchange has spent most of 1996 focusing its marketing
efforts on contracts released the previous year. "While we are always
looking for new product ideas, the markets are very mature now, and we have
several new products awaiting SEC approval," says Joseph Rizzello,
executive vice president of marketing and development.
One of the most promising of these new ideas now in the pipeline is an
equity system that will allow customers to buy and sell individual stocks
according to a volume-weighted average price (VWAP). This means that institutional
investors can buy and sell large quantities of stocks without having to
worry about intraday volatility. "Some brokers guarantee VWAP prices
to their customers, and we want to do this on a national level, becoming
a country-wide benchmark for VWAP," says Rizzello.
If all goes well on the regulatory side, the VWAP system contract will
be introduced in 1997. Other products on the way in 1997 include DIVs, OWLs
and RISKs, which will allow investors to purchase one of three components
of an individual equity-either the dividend (DIV) portion, the "corpus"
of the stock (OWL) or the speculative portion (RISK). "These products
are likely to be approved over the next year or so, provided we are able
to work out some operational issues."