PHLX Takes Another Shot at Currency Derivatives

---

RETESTING THE WATERS
With competition in the equity options arena reaching a fever pitch, the Philadelphia Stock Exchange(PHLX) has once again turned to forex as an alternative avenue for growth.

PHLX's latest forays into the world of forex consist of both World Currency Options (WCO) and World Currency Futures (WCF). The WCO contracts will be offered on the Japanese Yen (XDN), Swiss Franc (XDS), Canadian Dollar (XDC) and Australian Dollar (XDA). These options will be accompanied by WCF contracts on the Euro (EU9) and British Pound (BP9). The futures contracts will trade on the Philadelphia Board of Trade (PBOT), the futures arm of the PHLX.

FREEDOM OF CHOICE
The simultaneous announcement of currency options and futures plays into PHLX's longstanding strategy of offering choice to retail investors. Until relatively recently, securities investors who wanted to trade currencies had no choice but to turn to the futures markets. This is a difficult and daunting step for many retail customers. As a result, it was a significant roadblock to retail penetration into the forex world.


However, by simultaneously announcing WCO and WCF contracts, PHLX has given retail customers their choice of markets.  "These "mirror", or sister, securities options and futures are right-sized for retail traders," said DanielCarrigan, PHLX Vice President of New Products. "The retail investor can now decide to place a foreign exchangetrade in either a securities or futures accounts."

This newfound level of choice follows on the heels of the ETF explosion that has taken the equity world by storm. Retail securities investors now have access to markets that they once only dreamed about, and the PHLX hopes to extend that level of freedom to forex.

BITE-SIZE CONTRACTS
Choice of account is not the only tactic that PHLX is using to target retail investors. The typical currency future is a large contract that incorporates much more directional risk than the average investor needs or wants. In order to address this problem, PHLX has scaled down the size of their options and futures contracts to better suit the needs of the retail market.

Most of the new WCO and WCF products will have a contract size of 10,000 currency units. The lone exception to this size restriction is the XDN option on the Japanese Yen, which will have a contract size of 1,000,000 Yen. However, given the lower value of the Yen relative to the other currencies, XDN options will pose a similar risk profile to the other contracts.

SEC VS. CFTC
Unfortunately, all is not well with the PHLX's new contracts. While the WCF contracts were launched on April 27, the WCO contracts have been trapped by the old bugbear of the options world - regulation. As with many other products in the options pipeline, the WCO contracts are stuck in the ether awaiting SEC approval.

This delay is symptomatic of the enormous gulf that exists between futures and options regulation. The PHLX was able to submit the WCF contracts to the CFTC, receive approval and launch the products into the market with relatively little hassle. However, the similar WCO contracts have to undergo a far more lengthy and complex review process before they receive their greenlight. For an exchange that has to compete in both worlds, this can be extremely frustrating. "Regulation needs to evolve as the technology and the markets evolve," says Meyer "Sandy" Frucher, Chairman & CEO of the PHLX. "The point that we're trying to make is that we're putting out identical products, but they're regulated completely differently. That makes absolutely no sense."

BACK TO THE WELL
This isn't the first time that the PHLX has endured a lengthy SEC review process for a currency product. They underwent a similar ordeal last year when they announced their Euro and British Pound WCO contracts. Both of these products underwent multiple delays before finally reaching the market on January 8.

So far, the response to the initial WCO products has been underwhelming. The Euro and British Pound contracts have traded a little over 100,000 contracts in total since their January launch. PHLX is hoping for much more retail traction with their Japanese Yen, Swiss Franc, Australian Dollar and Canadian dollar contracts.

That is, if the SEC ever gives them the greenlight...
"

---

View Mark S. Longo's post archive >