Futures Trading Systems | Commodity Courses | Stock Futures | Futures Brokers | Options Training | Futures Charts | Futures Courses | Simulated Trading | Futures Education | Futures News | Papertrading | Futures Quotes | Futures Research | Futures Trading | Commodities | Futures Training | Options | Futures Options | Paper Trading | Futures Education

Nasdaq Liffe Markets Issue Selection Process

by Howard Simons, NQLX's Special Academic Advisor.

Financial markets exist in large part as risk transference and liquidity provision mechanisms, so they should be designed to accommodate the inevitable wild markets and volatility surges. How did Nasdaq Liffe Markets account for this in its process of selecting which stocks to underlay its single stock futures (SSFs)?

First, SSFs have a massive advantage over alternative products in their ability to handle specific security risk as opposed to general market, or systemic, risk. After all, if you want to adjust your risk exposure to IBM, then trade IBM futures, not S&P 500 futures. This argues that the availability of SSFs should be a function, in part, of the specific risk for each security.

Second, the best place to measure volatility is the one market dependent thereon, options. If we view options as a form of insurance – and we should - then volatility represents the price traders are willing to pay for a measure of certainty. High volatility indicates demand for risk protection, and it is the job of exchanges to answer this call. Another consideration here is the likely synergies between options trading and SSF trading.

Finally, exchanges need to remember a truism from the petroleum industry, and that is the best place to look for oil is where you’ve already found it. Quite simply, there’s no better indication of the market’s demand for risk management and price discovery than existing trade volume.

The Proof Is In The Pudding
Will exchanges paying attention to their customers’ interests as defined above lead to successful SSF products? Empirical evidence suggests combining these factors into a proprietary objective function can be confirmed by trading volume in individual equity options, the products most similar to SSFs. Our research indicates that combining the variables linked to customer demand is rewarded with exponentially accelerating volume.

The implications of this objective function for SSF acceptance are astonishing. The very phenomena that produce backward bending volume curves elsewhere, such as overnight and early morning gaps, high volatility, and a great deal of stock specific risk should increase demand for SSFs.

Contact us for more information or call us at 1.800.542.1022
*There is a substantial risk of loss in trading futures and options. Your use of this website constitutes acceptance of the Alaron Privacy Policy.