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Improved Financing with Single Stock Futures
- Thread starter OneChicago
- Start date
'One' if that is you hitting the calculator using 'A' then you are earning a nice return on your deposit. If you lower that then the numbers won't be so good as it makes buying the stock look worse as you opportunity cost is very high.
Conversely you will notice that it will make selling the future even better as you are able to satisfy the margin requirement on the SSF with a T-Bill and continue to earn money at your deposit rate.
Conversely you will notice that it will make selling the future even better as you are able to satisfy the margin requirement on the SSF with a T-Bill and continue to earn money at your deposit rate.
I don't think those are my entries - probably a few people trying it out your link since you posted it.
In any case, I might be wrong but it seems you accidentally got the relationship between the rate earned on deposits and opportunity costs backwards: seems to me that lowering the rate earned on deposits lowers the opportunity cost of purchasing stocks and makes SSF relatively less attractive than when higher rates are earned on deposits. Maybe I misread your first paragraph, but I understand the point you were making.
One question: does the calculator take into consideration the smaller spreads in cash versus futures - it seems it might based on the choices offered offered under "quotes". I was assuming it used the same purchase or sale price but was too lazy to confirm on my own calc.
In any case, I might be wrong but it seems you accidentally got the relationship between the rate earned on deposits and opportunity costs backwards: seems to me that lowering the rate earned on deposits lowers the opportunity cost of purchasing stocks and makes SSF relatively less attractive than when higher rates are earned on deposits. Maybe I misread your first paragraph, but I understand the point you were making.
One question: does the calculator take into consideration the smaller spreads in cash versus futures - it seems it might based on the choices offered offered under "quotes". I was assuming it used the same purchase or sale price but was too lazy to confirm on my own calc.
No I did not get it wrong.
When you purchase an asset you are either borrowing from yourself or you are borrowing from an external source.
In the case of stock trading you would borrow from you broker (the external source) or you could use your own funds that are currently earning a return.
If you are earning 4% on your deposit rate then you are forgoing that when you purchase a stock. Accordingly that is lost opportunity that you must make up and therefore represents a cost.
If your deposit rate is lower than your opportunity lost is lower and your cost of buying the asset falls as well.
The calculator simply uses the bids and offers in both markets and uses a weighted average of the costs and incomes using those values that the user inputs.
It does not care about the spreads. It just assumes that you buy offers and sell bids. Because of the wide bid/ask in the futures this makes the SSF look worse.
As traders you should always attempt to compete with bids and offers inside the posted markets. This does not guarantee that you will execute a trade but there are some instances where you will be able to better.
BTW if you hover your mouse over any of the values in the calculator you will see the math used to derive the numbers. In some instances you will see the date and time of the quotes and in others you will see an explanation of where the numbers come from.
We took great pains to be as transparent as possible to avoid any criticism that we were 'painting the tape'.
Again.....this is a tool to evaluate two different worlds and all traders should do their homework and make sure they understand the trade completely. With just a little bit of effort you might be able to improve your returns by examining all paths to market.
When you purchase an asset you are either borrowing from yourself or you are borrowing from an external source.
In the case of stock trading you would borrow from you broker (the external source) or you could use your own funds that are currently earning a return.
If you are earning 4% on your deposit rate then you are forgoing that when you purchase a stock. Accordingly that is lost opportunity that you must make up and therefore represents a cost.
If your deposit rate is lower than your opportunity lost is lower and your cost of buying the asset falls as well.
The calculator simply uses the bids and offers in both markets and uses a weighted average of the costs and incomes using those values that the user inputs.
It does not care about the spreads. It just assumes that you buy offers and sell bids. Because of the wide bid/ask in the futures this makes the SSF look worse.
As traders you should always attempt to compete with bids and offers inside the posted markets. This does not guarantee that you will execute a trade but there are some instances where you will be able to better.
BTW if you hover your mouse over any of the values in the calculator you will see the math used to derive the numbers. In some instances you will see the date and time of the quotes and in others you will see an explanation of where the numbers come from.
We took great pains to be as transparent as possible to avoid any criticism that we were 'painting the tape'.
Again.....this is a tool to evaluate two different worlds and all traders should do their homework and make sure they understand the trade completely. With just a little bit of effort you might be able to improve your returns by examining all paths to market.
Not trying to be negative, but...
I have followed SSF since their intitial implmentation. One of the potential advantages was the ability to avoid the uptick requirment. This is obviously no longer applicable and their were other ways to avoid the uptick requirement when SSF's were first established.
Unfortunatley the liquidity never developed in these markets. The contract size of 100 shares was misguided in my opinion. It should have been 1,000 shares.
Increased day tradign buying power for equities also inhibited SSF devoplment.
If that is not enough, far greater leverage and liquidity is available in the options markets...
My idea would be to alter the SSF contract specs and move them to a platform that has significant volume runnign through it such as NASDAQ, NYSE, ARCA, INET, ISE...
An options exchange might be ideal as the contract could appear right in the option chain....
I have followed SSF since their intitial implmentation. One of the potential advantages was the ability to avoid the uptick requirment. This is obviously no longer applicable and their were other ways to avoid the uptick requirement when SSF's were first established.
Unfortunatley the liquidity never developed in these markets. The contract size of 100 shares was misguided in my opinion. It should have been 1,000 shares.
Increased day tradign buying power for equities also inhibited SSF devoplment.
If that is not enough, far greater leverage and liquidity is available in the options markets...
My idea would be to alter the SSF contract specs and move them to a platform that has significant volume runnign through it such as NASDAQ, NYSE, ARCA, INET, ISE...
An options exchange might be ideal as the contract could appear right in the option chain....
OC,
Wasn't questioning your understanding of the mechanics, but think I am mis-reading where you wrote, "...you are earning a nice return on your deposit. If you lower that then the numbers won't be so good as it makes buying the stock look worse as you opportunity cost is very high." (thought you were suggesting that buying stock looked worse if you lowered the assumed rate earned on deposits.)
I'll take a closer look to understand how the calc. is using the bid and ask per your suggestion. In the end though, I think you will agree that since interest earnings and costs are a function of time, the relative attractiveness of trades in stocks versus futures is a function of the duration of the trade. For example, the benefits of SSF will be considerably larger for someone holding a trade 60 days versus 1 day, and nonexistant for someone day trading. The longer the trade the more likely the difference in interest earned and paid will overcome the larger cost of the spreads in SSF, which is not time dependent.
Thanks again for the post and the link to the calculator.
Wasn't questioning your understanding of the mechanics, but think I am mis-reading where you wrote, "...you are earning a nice return on your deposit. If you lower that then the numbers won't be so good as it makes buying the stock look worse as you opportunity cost is very high." (thought you were suggesting that buying stock looked worse if you lowered the assumed rate earned on deposits.)
I'll take a closer look to understand how the calc. is using the bid and ask per your suggestion. In the end though, I think you will agree that since interest earnings and costs are a function of time, the relative attractiveness of trades in stocks versus futures is a function of the duration of the trade. For example, the benefits of SSF will be considerably larger for someone holding a trade 60 days versus 1 day, and nonexistant for someone day trading. The longer the trade the more likely the difference in interest earned and paid will overcome the larger cost of the spreads in SSF, which is not time dependent.
Thanks again for the post and the link to the calculator.
Well the fact is Congress was sold a bill of goods when they bought into the idea that SSFs compete with the options market.
They don't. They compete with the brokerage firms finance and stock loan divisions.
Margin (or leverage) is set by the SEC and they are very set in their ways. I am resigned to trying to change the laws through Congress which will take a bit of time.
As to the multiplier...it is what is is. We have set the multiplier in the ETF futures on QQQQ, IWM and SPY at 1000 and I have received many requests to reduce it to 100 as it is too big a contract for most traders. I understand what you are saying but the 100 multiplier is here to stay for the time being.
As to the options market being a better more liquid alternative.....for trading perhaps but for financing long and short positions, no.
Let's examine transaction fees. To establish a synthetic long position in options requires two trades (call and put) and two commissions. The options value have delta, gamma, theta,vega and rho risk.
To price an option requires calculus...a high level math. To price a SSF requires addition, subtraction, multiplication and division. Fairly simple stuff.
As I posted earlier SSF low volume to date has less to do with the value they represents vis-a-vis other products then the threat they pose to the brokerage firm profits centers.
In my discussions with all of the Prime Brokers it is never the Options head that says no.
It is never the head of futures that says no.
It is never the head of equity trading that says no.
It is always the head of stock loan or Prime finance that says they don't want their customers to have access to the SSF product.
Why?
I don't agree that SSF products have to move to a different venue. CBOEDirect is a terrific platform with a wide distribution network and redundant processes. I have no problem with it at all.
They don't. They compete with the brokerage firms finance and stock loan divisions.
Margin (or leverage) is set by the SEC and they are very set in their ways. I am resigned to trying to change the laws through Congress which will take a bit of time.
As to the multiplier...it is what is is. We have set the multiplier in the ETF futures on QQQQ, IWM and SPY at 1000 and I have received many requests to reduce it to 100 as it is too big a contract for most traders. I understand what you are saying but the 100 multiplier is here to stay for the time being.
As to the options market being a better more liquid alternative.....for trading perhaps but for financing long and short positions, no.
Let's examine transaction fees. To establish a synthetic long position in options requires two trades (call and put) and two commissions. The options value have delta, gamma, theta,vega and rho risk.
To price an option requires calculus...a high level math. To price a SSF requires addition, subtraction, multiplication and division. Fairly simple stuff.
As I posted earlier SSF low volume to date has less to do with the value they represents vis-a-vis other products then the threat they pose to the brokerage firm profits centers.
In my discussions with all of the Prime Brokers it is never the Options head that says no.
It is never the head of futures that says no.
It is never the head of equity trading that says no.
It is always the head of stock loan or Prime finance that says they don't want their customers to have access to the SSF product.
Why?
I don't agree that SSF products have to move to a different venue. CBOEDirect is a terrific platform with a wide distribution network and redundant processes. I have no problem with it at all.
'One':
SSFs are not for day traders. You are correct as the value goes down dramatically.
For customers holding positions and paying interest on margin loans over time the value of the SSF position is indisputable.
For customers selling short and receiving a rebate on the invested short sale proceeds they will always do better selling the SSF and collecting 100% of the built in competitive interest rate.
Sorry if there was an miscommunication concerning the (i) rates.
SSFs are not for day traders. You are correct as the value goes down dramatically.
For customers holding positions and paying interest on margin loans over time the value of the SSF position is indisputable.
For customers selling short and receiving a rebate on the invested short sale proceeds they will always do better selling the SSF and collecting 100% of the built in competitive interest rate.
Sorry if there was an miscommunication concerning the (i) rates.