A Product I Never Expected to Discuss Again

A new market trend has emerged this year.  Financial products that had seemingly been left for dead have returned to life.  Binary options, which were launched in 2008, never really took off in their exchange-traded formats but later morphed into the basic logic behind prediction markets.  Today, the CME returns single stock futures (SSF) to the market landscape.  Hey, at least this means we can once again refer to quarterly expirations as “quadruple witching.”

Single stock futures were listed in 2002, when the Commodity Futures Modernization Act of 2000 legalized these products in the US.  There were two competing exchanges: NQLX, owned by Nasdaq (which at the time was owned by Euronext Liffe), and OneChicago, which began as a joint venture of the CME, Cboe, and Chicago Board of Trade.  NQLX folded in 2004, but OneChicago persisted until September 2020.  I am personally quite familiar with OneChicago and SSFs because IBKR bought 40% of that exchange, and while one of my colleagues had primary responsibility for making markets on that exchange, I sat next to him and backed him up when he was out of the office.  Unfortunately, SSFs never gained traction with investors during that time.

Historically, SSFs in other countries thrived only under 1 of 3 conditions:

1. SSFs have lower margin requirements than stocks.  High interest rates made the margin differential more meaningful.  This has not been the case in the US for decades.
2. Short selling was subject to restrictions.  There are regulations about short selling, but they are not onerous in the US. 
3. Favorable tax treatment for dividends for foreign investors.  In their last iteration, SSFs were popular products with foreign holders of US stocks who wanted to avoid dividend withholding, but the IRS closed that loophole.

As noted above, there is a key advantage to SSFs – futures tend to trade with less margin than individual stocks.  That can be as low as 15%.  Prevailing interest rates were higher when SSFs were launched, though investor appetite for leveraged speculation in the wake of the internet bubble was not particularly high.  Then, after the Global Financial Crisis, interest rates were quite low, making the margin differential less appealing.  Rates are now off their post-Covid lows, but that doesn’t seem to be the reason for the reintroduction of SSFs.

Leveraged ETFs have become especially popular in recent months, and the CME certainly can’t be blind to that trend.  This offering of SSFs is aimed squarely at individual investors, not institutions, particularly those with 10x, not 100x multipliers.  The smaller multiplier makes them more accessible to smaller investors. 

Further, unlike the options that are embedded in leveraged ETFs, futures don’t decay.  This avoids much of the performance drag that hinders investing in leveraged ETFs.  Like options, they do expire, though.

It is apparent that the reintroduction of SSFs is designed to appeal to highly speculative investors.  Investors have demonstrated their willingness and desire for leveraged exposure to single stocks.  There can certainly be debates about whether high levels of speculation in leveraged products are risk factors for market stability.  Much will depend upon whether investors perceive adequate liquidity and appeal for the new version of the old products.