These are among the main findings of a new report by the Centre for the Study of Financial Innovation, the City of London-based think tank. The report says that SSFs offer a cheap and efficient alternative to direct cash investment in shares. By allowing investors or speculators to gain leveraged exposure to selected stocks for a fraction of the price of direct investment, SSFs are ideal for hedging purposes, and also for portfolio structuring when direct transactions might not be possible for cost or tax reasons. In the UK, SSFs are exempt from stamp duty.
Because futures on stocks from many countries can be traded on a single exchange, they also eliminate cross-borders trading costs, which have been identified as a major barrier to the growth of global equity trading. Currently only London's LIFFE market offers that possibility.
SSFs carry higher risk than direct investment as use of leverage can magnify losses as well as gains. However the report says that regulators will insist that dealers apply "suitability" tests when recommending these instruments to their clients.
The study points out that the use of SSFs is now spreading after a slow start. The strongest advances have been in Europe where nine exchanges offer futures contracts on single stocks. The widest range of international SSFs (a total of 96) is traded on LIFFE, though other exchanges such as Spain's Meff are also achieving growing volumes on a limited number of domestic contracts. With the recent lifting of a US regulatory ban, exchanges in New York and Chicago will shortly be offering SSFs to the world's largest equity market.
The study predicts that trading in the world's top blue chip SSFs will become concentrated in a small number of international exchanges, though regional trading should be active in stocks with more local interest.
David Lascelles, the CSFI co-director who authored the report, said: "Single stock futures should give a big impetus to global equity trading by bringing down the cost and opening up access to foreign markets. They also create possibilities for sophisticated speculation and portfolio structuring strategies."
"Single stock futures: the ultimate derivative" was sponsored by LIFFE, and produced under independent editorial control by the CSFI. The CSFI is funded by some 70 institutions to research innovative developments in the finance business.
"Single stock futures: the ultimate derivative" (price £25/$40/€45) is available from the CSFI, 5 Derby Street, London W1J 7AB, UK. Tel +44 (0)20 7493 0173. The report can also be downloaded free from www.csfi.org.uk.
For more information contact David Lascelles on +44 (0)20 7493 0173 (office) or +44 (0)7710 088658 (mobile).
