By John J. Lothian
David Downey is as pugnacious as he is passionate. He has battled and won, retired, and come back to battle again. Current CEO of OneChicago, he is a man on a mission to bring understanding and respect for OneChicago and its products. It is a fight he believes in and one he does not plan on leaving unfinished.
I first met Downey on the Internet back in its Wild West days. I interacted with him on the same online venues where I came across Jon Matte, now COO of John J. Lothian & Company, Inc. and assistant editor of this newsletter. Downey stood out then and he still stands out today.
At one point when I was unsure of the direction of the industry and the future of the introducing broker model, I approached Downey for some industry networking and idea sharing. He bought me a drink and told me he would not even talk to me until I read a book he suggested. The book was “The Innovator’s Dilemma” by Harvard professor Clayton Christensen. I have told this story before here.
I bought that book and read it twice. The lessons it taught me have stayed with me and have found their way into my business strategies since then.
Last Wednesday Downey and Tom McCabe of OneChicago conducted a private roundtable discussion about securities futures and how OneChicago fits into the post Dodd-Frank regulatory world. Downey did a passionate job of explaining how single-stock futures are really stock loans, repos and swaps.
With all the rigmarole about defining swaps, setting up clearing and setting the rules, he points out that in the equity world all that is already done. It is done at OneChicago.
He explained how the OneChicago EFP, or exchange for physical, is the equivalent to OTC equity swaps, such as securities lending and equity repos. He also went into detail on why the OneChicago EFP should have the same tax treatment and regulatory fees as OTC swaps.
Downey detailed how individual traders or investors could use EFPs on OneChicago to borrow money at lower rates than banks are offering. He showed how these transactions are simply stock loans, repos and swaps and allow investors to monetize their equity positions while keeping their same exposure in those stocks.
With the OneChicago NoDivRisk products – first launched back on Oct. 27, 2010 – investors, traders and market makers no longer have to worry about the expected dividends that were part of the pricing formula for OneChicago’s initial products. All the risk and uncertainty with dividends has been eliminated with the NoDivRisk OneChicago contracts. The risk is avoided.
The dynamics of the NoDivRisk EFP trade comes down simply to an interest rate. EFPs that are general collateral, or non-hard-to-borrow stocks, will trade at a positive price to the stock price. This is the carry a customer must pay to hold the single stock futures. An interesting feature Downey points out is that as interest rates rise, the SSF price rises relative to the stock price and the long holder of the SSF position makes more money. Alternatively, a trader with a margined position on some stocks will see his broker-loan rate costs go up when interest rates rise. Use SSFs and win, use a stock-loan and lose.
When Downey was asked by a Dow Jones reporter at the roundtable if he had asked for some political help from some of his large institutional owners, he flatly said no. He has been given permission by the board to get him a lobbyist to help him navigate Washington, DC to get OneChicago’s message out; but he said he does not need one. He is constantly in touch with officials at the U.S. Treasury, IRS and SEC to educate them about how OneChicago’s EFPs are the same thing as the swaps, repos and stock loans they are working on regulating. He has staked out the high ground and is standing it firmly. He has firmly embraced Clayton Christensen’s advice to create a separate culture for an independent organization capable of bringing disruptive technologies to bear on competitors.
OneChicago is available now. The regulations and rules are already set. The clearinghouse is AA+ rated and industry owned. There is an existing flow of trades through the exchange and clearinghouse and firms are already connected.
Do you want to trade an equity repo and have it cleared? OneChicago can do it for you today.