Dollar's Futures Still Waiting To Come Of Age
Sydney Morning Herald
Monday June 15, 1987
Trading of Australian dollar futures contracts on the Chicago Mercantile Exchange has picked up in the past couple of weeks, helped by interest from a new player.
Chicago Mercantile Exchange manager, currency products, Mr David Johnson says that financial services group Cahill Investor Services recently told the Chicago exchange it wanted to be an active player in the Australian dollar futures market.
Action speaking louder than words, Cahill's participation in the market is attributed to the early June jump in trading volume of Australian dollar futures contracts which are averaging 370 contracts a day.
However, even with the promising early June figures, the volume has to triple before the Chicago Mercantile Exchange can hope for permission from Federal authorities to start trading Australian dollar options on futures.
Options often go hand in hand with a futures contract and can be more attractive, as the price paid for the option is the absolute limit of the buyer's risk.
When the Australian dollar futures contracts began trading on the Chicago Mercantile Exchange in January, it was hailed in Australia as signalling the"coming of age" for the Australian dollar.
However, that clearly was wishful thinking.
While in January an average of 400 Australian dollar futures contracts a day were traded, worth $A40 million, last month the average was only 220 contracts a day and for April the figures are even worse.
On a recent visit to the Chicago Mercantile Exchange only one contract was traded during the 20 or so minutes spent observing the Australian dollar pit.
This compared with other pits where the trading was frantic in currency futures for the pound, Canadian dollar, the mark, the yen, the Swiss franc, the European Currency unit and even the French franc.
In the Australian dollar pit, three people were standing silently, mostly staring at the screens monitoring the day's activity on the cash market and forward market by the ANZ, the Commonwealth, FAS Macquarie and others.
Finally, a young man in a red jacket unenthusiastically says: "72 bid for 15 September."
A woman steps forward, saying: "I've got one at 74".
There's a long pause. Then the same woman says: "I'll sell one at 72".
What all that means is that a futures contract was traded at .6872 US dollars for delivery onSeptember 15 this year. Each contract is worth$A100,000.
There was only one company, Prudential Bache, monitoring the floor with an open line to Westpac's foreign exchange dealer in New York.
However, Westpac apparently has changed its bed-partner to Merrill Lynch Capital Markets recently, although Prudential Bache is still executing orders for others.
The Prudential Bache representative says a reason for the slowness of trading in the Australian dollar futures contract is the inherent problem caused by the time difference. "Most of the action happens while we're in bed."
While the Chicago Board of Trade, competitor of the Chicago Mercantile Exchange inaugurated night trading last month, with an additional evening schedule from 6pm to 9pm (Australian time 9am to noon), there are no similar plans by the mercantile exchange which is the only place here the Australian dollar futures contract is being traded.
The Chicago Mercantile Exchange is concerned about the slow Australian dollar contract, although marketing officer Mr James Slentz says: "There's no need to panic as new contracts often need help."
He says the Eurodollar interest rate futures contract had a slow start when it was introducedin 1982 with about 625 contracts a day during its first four months. (This is more than double the average of the Australian dollar futures contract for its first four months).
In April, the Eurodollar averaged 122,000 contracts a day and is the exchange's most successful contract.
"We are still in the exploration stage (with the Australian dollar contract), but as a short-term bandage we need to get retail people interested, people like you and me and locals to take the other side of the contract so that we have a liquid market," says Mr Slentz.
"We've got the big guys interested."
Elders was a keen player in the Australia dollar futures market when the contract was introduced and used to have a man full-time at the pit. But it is not worthwhile on the present paltry volumes and now, like Dean Witter Reynolds, Elders is only an occasional participant.
An Elders representative on the floor of the exchange says: "Our interest lies more in the Canadian dollar, the deutschmark and the Swiss franc, but we are always willing to make a bid or market (in the Australian dollar) for anyone who needs it".
"What the market lacks mostly is the retail and scalping business. The banks will always be there, but the market is too wide at present," he says.
However, not everyone is gloomy about the Australian dollar futures contract.
The Commonwealth Bank feels it has scored a coup by being appointed agent for the contract, although none of the other Australian banks in Chicago were interested because they thought it was too much effort for little return.
Having opened its office in Chicago only 18 months ago, the Commonwealth believes its agent'srole gives it good exposure in the market and that it is prestigious.
The Commonwealth's Chicago branch vice-president, Mr Mark Fuller, says the bank also is able to glean good market intelligence from its role as agent.
"We know how much money needs to be sold that day and who the buyers and sellers are. So, if a competitor bank asks for our price for the Australian dollar, and we know that they have a large deal, we know whether they're buyers or sellers and where we stand," Mr Fuller says.
While the Commonwealth doesn't necessarily get the deals relating to settlement of the Australian dollar contracts, "we can structure our book to our advantage because we know what's going on," says Mr Fuller.
© 1987 Sydney Morning Herald