Are cash settled stock futures basically bucket shop betting?

[beefcaketrade]

I get that you can use this extra 'tool' of a futures contract for hedging purposes. Say you want to do a long/short position. Or maybe you want to make outright directional bets. Or maybe you want to use the leverage.

But what is the point of stock futures that are cash settled? They basically act like a bucket shop where you just make your bet, and at the end of the day during settlement you get or you have to pay cash depending if you 'win or lose'. You dont even get the shares.

This is not the case for single stock futures traded on OneChicago which are physically settled and the underlying is the equity with shares delivered to you. So this one is good.

I'm talking about some of the equity futures trading in some asian markets. They are cash settled stock futures. If you are long a stock futures contract, you don't get the shares at the end. It just settles out in cash. Ok sure, you can just go ahead and buy said equivalent shares in the open market at expiration date so as to 'roll over' from futures position to equity position. But it really defeats the point of the futures contract.

IMO cash settled futures when used to make directional bets act like bucket shop bets. You don't get nothing but you get to bet on the direction of the underlying.

Well, index futures from all futures exchanges are cash settled. So yea, there you go.

 

[cmb]

It's risk. You are buying risk from someone who does not want it anymore. You are welcome to hold that risk as long as it makes sense for u to hold it.

Yeah, you don't get to "hold a stock in your hand", but who here has ever had anything to do with the product ou are trading?

Unless you want to stock up on coffee, orange juice and sugar or gold...I doubt anyone here cares about what's being traded, as long as it moves.

 

[eurusdzn]

With all the money in the world and a tiny percentage of collateral backing it how else can money be made without cash settled contracts.
What secures swaps?
Wheres Martin?

Oh wait, the mainstreet taxpayer? Margin / bond posted due by April 15th in the US.

 

[beefcaketrade]

Quote from cmb:

It's risk. You are buying risk from someone who does not want it anymore. You are welcome to hold that risk as long as it makes sense for u to hold it.

Yeah, you don't get to "hold a stock in your hand", but who here has ever had anything to do with the product ou are trading?

Unless you want to stock up on coffee, orange juice and sugar or gold...I doubt anyone here cares about what's being traded, as long as it moves.

I'm not on board with what you mean by the part about risk. And the futures very often track the underlying in price movements in real time.

Yeah, traders often don't care what they are trading. Mostly its about price movements. Buy low sell high. But there is genuine benefit to being able to take delivery of the underlying stock in the case of stock futures.

 

[Martinghoul]

Quote from eurusdzn:
With all the money in the world and a tiny percentage of collateral backing it how else can money be made without cash settled contracts.
What secures swaps?
Wheres Martin?

Oh wait, the mainstreet taxpayer? Margin / bond posted due by April 15th in the US.

The same thing that secures futures secures swaps. Specifically, margin posted by mkt participants, as well as the entire capital structure of the clearing houses.

So no, it ain't the taxpayer. Like I said before, when Lehman went down, LCH had to process a default of a $9trn notional portfolio of swaps. It used only arnd 35% of the initial margin posted.

As to the OP's post, I don't really see what's so odious about cash-settled futures. It's a matter of convenience, more than anything, and I don't really see how it causes more issues than physically-settled futures. For example, I look at crude, both Brent and WTI contracts. Is Brent somehow more "evil" than WTI? Doesn't seem like that to me...

 

[beefcaketrade]

Quote from Martinghoul:As to the OP's post, I don't really see what's so odious about cash-settled futures. It's a matter of convenience, more than anything, and I don't really see how it causes more issues than physically-settled futures. For example, I look at crude, both Brent and WTI contracts. Is Brent somehow more "evil" than WTI? Doesn't seem like that to me... [/B]

Nobody is saying anything is evil. Its just that, that _is_ essentially what it is, to put it bluntly. For an average trader they don't care what something they trade is. Its just something with a symbol, a price and it moves. You make money buying low and selling high, whichever order comes first for long or short. But these financial instruments must be useful and serve a real purpose at some level, and some do.

But what does a bucket shop do? They take your money and you bet on the movement of the price without actually ever dealing with the real underlying. Say you bet that MSFT goes up.

For a normal broker, you buy shares or buy call options to make this bet. If you are right, you can sell shares or exercise or sell the call. You own or have the right to own in the case of calls, the actual underlying shares of MSFT. If price falls, well, at least you still actually purchased MSFT shares and can collect dividends or actually owned the right to own MSFT shares in the case of calls.

In a bucket shop, you make a bet. The bookie takes the other side of your trade and if you are right you get paid. If price is up you get paid in cash. If the price falls, well, you lose your bet, and at the end of the day, you don't still hold the shares.

With cash settled stock futures this is basically like a bucket shop betting if you make speculative directional bets. You don't own nothing. You make a bet on a direction. If it moves in that direction you get paid in cash. If it moves in another direction you owe them cash because guess what its not physically settled.

Cash settled stock futures can function essentially like a bucket shop where you don't actually ever deal with the underlying. You only make bets based on price moves of the underlying and your payout is only ever in cash.

Take this in contrast to physically settled single-stock-futures traded on OneChicago. With these products, you will actually end up either being long shares or actually being short shares come contract expiration. Trading physically settled SSF on the OneChicago behaves like an 'early stock purchase' or 'early short sale' mechanism achieving a slightly different execution ACB price compared to similar execution in the cash market because the two markets (cash or futures) are different. So this is totally way more legit in my eyes.

 

[Martinghoul]

Quote from beefcaketrade:
Nobody is saying anything is evil. Its just that, that _is_ essentially what it is, to put it bluntly. For an average trader they don't care what something they trade is. Its just something with a symbol, a price and it moves. You make money buying low and selling high, whichever order comes first for long or short. But these financial instruments must be useful and serve a real purpose at some level, and some do.

But what does a bucket shop do? They take your money and you bet on the movement of the price without actually ever dealing with the real underlying. Say you bet that MSFT goes up.

For a normal broker, you buy shares or buy call options to make this bet. If you are right, you can sell shares or exercise or sell the call. You own or have the right to own in the case of calls, the actual underlying shares of MSFT. If price falls, well, at least you still actually purchased MSFT shares and can collect dividends or actually owned the right to own MSFT shares in the case of calls.

In a bucket shop, you make a bet. The bookie takes the other side of your trade and if you are right you get paid. If price is up you get paid in cash. If the price falls, well, you lose your bet, and at the end of the day, you don't still hold the shares.

With cash settled stock futures this is basically like a bucket shop betting if you make speculative directional bets. You don't own nothing. You make a bet on a direction. If it moves in that direction you get paid in cash. If it moves in another direction you owe them cash because guess what its not physically settled.

Cash settled stock futures can function essentially like a bucket shop where you don't actually ever deal with the underlying. You only make bets based on price moves of the underlying and your payout is only ever in cash.

Take this in contrast to physically settled single-stock-futures traded on OneChicago. With these products, you will actually end up either being long shares or actually being short shares come contract expiration. Trading physically settled SSF on the OneChicago behaves like an 'early stock purchase' or 'early short sale' mechanism achieving a slightly different execution ACB price compared to similar execution in the cash market because the two markets (cash or futures) are different. So this is totally way more legit in my eyes.

Yeah, sure, I see what you're saying...

However, don't you think it's every individual's choice how to participate in the mkt? If someone wants to punt the underlying w/o understanding and appreciating what they're actually trading, it's their prerogative. Moreover, a lot of the hardcore TA practitioners would probably tell you that they would rather not know what they're physically trading by choice and that's how things should be. While I disagree, who am I to say they're wrong and I'm right?

Finally, if you wanna be philosophical about it, is a physical share really that different to the cash-settled "bucket shop" instrument? It's not like it's something tangible. Instead, it's an electronic ledger entry that entitles you to some future cash-flows, if you're lucky, and maybe a wee bit of control.

 

[beefcaketrade]

Quote from Martinghoul:

Yeah, sure, I see what you're saying...

However, don't you think it's every individual's choice how to participate in the mkt? If someone wants to punt the underlying w/o understanding and appreciating what they're actually trading, it's their prerogative. Moreover, a lot of the hardcore TA practitioners would probably tell you that they would rather not know what they're physically trading by choice and that's how things should be. While I disagree, who am I to say they're wrong and I'm right?

Finally, if you wanna be philosophical about it, is a physical share really that different to the cash-settled "bucket shop" instrument? It's not like it's something tangible. Instead, it's an electronic ledger entry that entitles you to some future cash-flows, if you're lucky, and maybe a wee bit of control.

No, I'm not trying to dig into philosophy of good or bad or useful or not useful. I actually find it plain sucks or is not useful at all.

As mentioned already. If a trader has intentions of taking delivery of the underlying, the futures market actually provides a great way to achieve a different price at any moment in time compared with the cash equity market.

Say you want to buy 100 shares of MSFT right now. You can either go to the cash market and buy 100 shares at $100, or at the same time, the futures market is trading MSFT futures at $99.5. So you say to hell with it, you go long MSFT single stock futures at $99.5 and you take delivery. This allows you to achieve a better ACB with your position. Or maybe you are an arbitrager, and you short MSFT in the cash market and go long MSFT SSFs to cover at a later date for riskless profit.

Contrast this with cash settled stock futures? You get jack. You get cash instead. This also triggers taxing event so now you have to deal with that aspect, whether capital gains or losses. On the other hand, a physically settled stock futures can be used to add onto your existing equity positions, and serve the purpose of adjusting your position's ACB by the time of expiration and the futures contract executed.

See, its totally different. Physically settled is way way superior and should be the way its done. Afterall that is kind of the point of the futures contracts. You can treat physically settled futures like a cash settled market also by closing contracts at expiration manually before delivery deadline.

With index futures, or forex futures, or bond futures I sort of understand why its cash settled. With stock futures it makes no sense when there is a tangible underlying involved. It almost seems like those futures exchanges are 'less capable' in that they are unable to secure the shares for the clearning members and market participants so they say to hell with it, just bet price moves and settle in cash.

 

[Martinghoul]

Quote from beefcaketrade:
No, I'm not trying to dig into philosophy of good or bad or useful or not useful. I actually find it plain sucks or is not useful at all.

As mentioned already. If a trader has intentions of taking delivery of the underlying, the futures market actually provides a great way to achieve a different price at any moment in time compared with the cash equity market.

Say you want to buy 100 shares of MSFT right now. You can either go to the cash market and buy 100 shares at $100, or at the same time, the futures market is trading MSFT futures at $99.5. So you say to hell with it, you go long MSFT single stock futures at $99.5 and you take delivery. This allows you to achieve a better ACB with your position. Or maybe you are an arbitrager, and you short MSFT in the cash market and go long MSFT SSFs to cover at a later date for riskless profit.

Contrast this with cash settled stock futures? You get jack. You get cash instead. This also triggers taxing event so now you have to deal with that aspect, whether capital gains or losses. On the other hand, a physically settled stock futures can be used to add onto your existing equity positions, and serve the purpose of adjusting your position's ACB by the time of expiration and the futures contract executed.

See, its totally different. Physically settled is way way superior and should be the way its done. Afterall that is kind of the point of the futures contracts. You can treat physically settled futures like a cash settled market also by closing contracts at expiration manually before delivery deadline.

With index futures, or forex futures, or bond futures I sort of understand why its cash settled. With stock futures it makes no sense when there is a tangible underlying involved. It almost seems like those futures exchanges are 'less capable' in that they are unable to secure the shares for the clearning members and market participants so they say to hell with it, just bet price moves and settle in cash.

Ain't no problem, sire... You're absolutely entitled to your opinion, which certainly appears to be a carefully considered one. I respectfully disagree.

Good luck!

 

[beefcaketrade]

Quote from Martinghoul:

Ain't no problem, sire... You're absolutely entitled to your opinion, which certainly appears to be a carefully considered one. I respectfully disagree.

Good luck!

I dont understand what you are disagreeing on?

I'm not disagreeing traders can trade whatever they want. You can go back to trading tulips or bitcoin. Its all the same. Buy low sell high.

I'm saying cash settled stock futures are a very different beast to physically settled stock futures. I mentioned the ability to get a different price of the shares at any given moment is one such advantage of physically settled futures. Or the idea that you do not trigger tax events at expiration when you take physical delivery but dont sell equity is another advantage, unlike cash settled futures which trigger a tax event for sure at expiration when you will surely realize a capital gain/loss.

There is really no underlying reason why stock futures cannot be physically settled, other than perhaps the system setup in place at certain futures exchanges are simply incapable of coming up with and transacting in the actual shares, and prefers to be a glorified bucket shop essentially that takes bets and matches orders and distributes cash around based on the outcome of the bets.