Quote from amazingIndustry:
Sorry if this came across as being a personal attack, it certainly is not , especially in light of the fact that I do not know the individual at all.
But one thing that gets me is that an executive level member of a securities exchange advises on an unsolicited basis without making the slightest disclosures regarding risk while the instruments he recommends are quoted at insane bid-offer spreads, basically preventing anyone from unwinding the same trade. Hence my comment re "what could ever go wrong"? Please take a look at the reputation money market funds have lost. Wasn't that a bullet proof way to park funds? Must have been, even the big guys were invested to the tune of billions. Only punitive punishment, law suits and the like have caused JPMorgan, Goldman and Co to close some of their euro denominated money market funds to new investors because it may harm existing investors' performance. Would this have happened years ago, that the very same banks closed their funds to new investors because existing ones may suffer? No way. The only difference is that regulators and the investing public looks at things more closely and with more suspicion.
Recommending EFPs to a guy who wants to inflation protect and "park" his funds without the slightest disclosure to risk and what could potentially go wrong while pointing to products with insane bid-offer spreads is only one thing: Highly unprofessional and negligent. I could come up with other terms but I try to tone it down here.
I am open to a lively and fair discussion and yes, I do sometimes jump the gun prematurely, so far the occasions I got burned are countable on one hand. But I admit I cast sometimes premature judgement. Its just in this case I comment after the fact, or have you seen a risk disclosure, have you seen an explanation of how slippage, execution related costs, the settlement, price volatility close to settlement may reduce the expected yield? There are probably a dozen other investments that are way less complex to put on, more cheaply to get out, while modeling a very similar pay-out. Am I missing something here? Or am I too long in the market and have heard too much "bs" to be so overly suspicious?
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Please understand I am not offended in any way. However I would like to clarify a couple of points.
OneChicago is not a securities exchange. We are a Designated Contract Market for the trading of Securities Futures under the joint regulation of both the SEC and the CFTC. Subtle distinction but very important.
The quote you refer to in ONXX was actually not something that I recommended. I did respond to a question that used that name as an example. I am not even sure if the market he quoted was correct. What is of interest is the bid/ask is meaningless unless you convert to an interest rate like we do on our website which I pointed to multiple times. On that page there are descriptions of trade flows in GC and HTB EFPs; a link to pricing of an EFP; a link to additional information on EFPs with multiple additional links and links to our Calculator which compares outright positions in Stocks vs SSF.
In addition they display currently tradeable (during normal trading hours) EFPs with a default sort by highest bid rate as people looking to create yield on idle cash would want to sell EFP as I have explained several times. You will note the bid/ask are not wide at all. They are rather tight while looking at the outright market (bid/ask) or the translated interest rate (bid rate/ ask rate).
In the below example which I pulled from our website today you can see the EFP for KGC1D (NoDivRisk contract) is 66 hundredths of a penny bid and 84 hundredths of a penny offered. 100 up or 10,000 share equivalent.
What is most important however is to look at the interest rate implied. Again using KGC on the top line you will see that the bid translates into a 78.5 basis point bid and the offer a 99.9 basis point offer.
The spread is 21.4 basis points. Not anywhere near the 2000 basis point (20%) that you point to.
With that said customers looking to create yield would be interested in only the bids that generate the yield and not necessarily the spread...however small it actually is.
Dividend Size Bid Rate Bid Ask Ask Rate Size
KGC1D 2012-08 OCX.NoDivRisk 100 0.785% 0.0066 0.0084 0.999% 100
KOG1D 2012-08 OCX.NoDivRisk 15 0.765% 0.0070 0.0094 1.028% 15
NUVA1D 2012-08 OCX.NoDivRisk 5 0.740% 0.0195 0.0235 0.892% 5
As to execution risk....this is precisely why you would execute the EFP and not leg into the trade. Since the two legs are executed simultaneously at a basis differential there is no execution risk. The legs go up as one transaction.
When the contract expires the trader needs to do nothing but let the back office process work as the long stock is used to satisfy the short SSF obligation and the position becomes null. I repeat what I have stated before . Transaction costs friction must be taken into account when doing these types of financing trades.
I would like to address this following sentence in some detail:
"Its just in this case I comment after the fact, or have you seen a risk disclosure, have you seen an explanation of how slippage, execution related costs, the settlement, price volatility close to settlement may reduce the expected yield? "
Each customer, prior to placing a trade, must be given a Risk disclosure document for Security Futures by their clearing firm. You can also find it on our website at:
http://www.onechicago.com/?page_id=91
I cannot explain slippage as I can't observe it. The quotes above were pulled 45 minutes ago. Looking at the screen now the markets are exactly the same despite movement in the market. Each of the quotes are hit/lift eligible. The markets will be the same all day long as it has nothing to do with price movement and everything to do with interest rates which don't really move for purposes of trading EFPs.
I did in fact explain, repeatedly, that transaction costs must be considered carefully.
I did in fact explain the settlement as the stock gets delivered to satisfy the short SSF obligation and the position becomes null.
Price volatility has absolutely nothing to do with the EFP. Nothing. At expiry the Stock and the SSF will be exactly equal to each other. Prior to expiry they will move point for point with each other and as you are long one and short the other you are delta neutral which implies you have no exposure to the price movement. Interest rates may move and the EFP price may go up or down but once you enter into the delta neutral transaction and carry through expiration you will have the interest rate you wanted at trade_date (less transaction cost) as a result.
I welcome any question anyone has regarding the process.
Best.
