The above article is very interesting. It documents the emergence of Single Stock Futures in the USA. It is interesting to note that Single Stock Futures were introduced in the US only as late as 2002. Three exchanges were permitted and only two (Nasdaq Life market and OneChicago) opted to go ahead. I leave it to you to see which large exchanges have not opted for it.
Indian exchanges rushed to introduce them. Alas, the Futures market in the NSE / BSE that deals in Single Stocks, is not a future trade at all. It is merely options. And the stock selection in the F&O segment, is a joke. There is no rationale behind adding a stock. Often, IPO’s get listed on to the F&O segment ! Closely held, illiquid stocks are also included in this list! This gives a manipulative push to the stocks concerned.
In India, the “Futures” in single stocks are settled in cash! This imparts a new meaning to ‘Futures’. Of course, the exchange makes good money on the turnover. In 1994, the FII’s, along with a couple of large influential and mindless brokers, persuaded the regulator to ban the “badla” system, which was far more advanced than any F&O market in the world. Not a single rupee has been lost due to any flaw in the system. Unfortunately, the foreigners did not understand them and in those days, there were a couple of large brokers who were aiming at selling out to foreigners who toed their line. They abused their proximity to the corridors of power and banned badla.
Now, badla gave way to the Indian style “F&O” market which enables manipulation in prices. No physical settlement is enforceable in the present system.
Now, SEBI has voiced a view of bringing in ‘physical’ settlement in the Futures segment. Once this comes, it will be interesting to see. If the free float is low, then it is great for the promoters to ramp up the prices. If there is decent free float, then it will become interesting. Money bags will hold the balance of power. Fundamental views will have nothing to do with the prices!
Watch the fun as it unfolds..