I The Logical Step Although some may argue that the introduction of SSFs was the next logical step in market growth, the odds are that it was a necessary step as well. The introduction of SSFs promised to bring much-needed nourishment into the securities and futures industries. Stock investors and traders who had previously been unwilling to use the futures markets or were unfamiliar with them now had a new and legitimate vehicle by which to either hedge their stock transactions or speculate on stocks with less up-front capital. Futures traders, who have long felt that stocks require too much margin or are not sufficiently volatile, now had a new trading vehicle that allowed them to capitalize on stock swings without the need to post the 50 percent (or more) margin required of stocks. Given that the SSF market is a fully electronic exchange, price executions are fair, efficiency is high, and order fills occur instantaneously (provided there is sufficient liquidity and activity). In all, the SSF market has ushered in a new era in trading for stock and futures trading. The Commodities Future Modernization Act (CFMA) will have fulfilled its purpose in modernizing the markets and, as a beneficial consequence, saving a distressed industry, so long as the new vehicle continues to gain popularity and trading volume. I The Evolution of Futures Trading Trading in futures had its origin in the development and growth of grain trade in the United States in the mid-1800s. Before the existence of U.S. futures markets (originally known as commodity markets), the Japanese futures exchange in silk and rice, as well as the English market in iron warrants, continued for many years and, to a given extent, functioned as models for U.S. markets. Futures trading in the United States evolved as a natural outgrowth of the need to protect producers and end users against volatile price moves in cash grains. Chicago assumed a leading role as the center of grain futures trading. Because the midwestern United States is the heart of a major agricultural producing region and Chicago is strategically located on the Great Lakes as a shipping hub, it was a natural site for trading in the cash and futures grain markets. Livestock trading also developed as large meat-packing houses made their home in the Chicago stockyards area. The Chicago Board of Trade was organized in 1848, but it was not until about 1859 that trading actually started. As noted previously, the need to control risk by producers and end users was the primary motivation for the creation of this exchange. As you will see in the chapters that follow, the impetus for the creation of a SSF market was essentially similar to the impetus for the creation of futures trading in Chicago so many years ago; it was intended to fulfill an economic purpose. The Chicago Board of Trade, once created, allowed producers (farmers), grain processing firms, and exporters to manage their risk and exposure to unknown elements, such as weather, political events, and economic uncertainties by hedging. The practice of hedging, which forms the substructure of all futures markets, became widely accepted as a viable approach to protect profits and minimize losses. stock symbol ~ money maker |