STA Blog

Late last month the Commodity Trading Futures Commission, the US’ main derivatives regulator, decided not to allow exchange traded bets on American political parties. They said: ‘the contracts involve gaming and activity that is unlawful under state law and are contrary to the public interest’. Within 48 hours of this statement I read that zero-day options on the S&P 500 index now account for half of all options traded on this index. Zeroes are options that expire within 24 hours; they have caused a concomitant volume drop in options maturing between a week and 2 months.

Please don’t tell me that these are being used for hedging purposes; this is out and out gambling. Deutsche Börse has just introduced zeroes on the Stoxx 50 European equities index, no doubt hoping to capitalise on their potential popularity with the day-trading community. Because this type of option has negligible duration, implied volatility is high and should attract market-makers. As a Brit I’m quite used to the idea of placing a bet on a horse race or on a football result – even while the match is in play. This has been the case in backgammon, where the pay-out can be doubled at intervals, as the game progresses. But these are clearly games and just a bit of fun. Not investments.

It started me thinking about which other instruments tread a fine line between punting, trading and investing. This will vary depending on the starting point. So a foreign exchange market-maker has deep pockets and makes a living from the bid/offer spread. A small-time speculator may use the FX market to bet on the outcome of an imminent data release or election.

Fractal ownership (including non-fungible tokens), in my view, is a variation on leverage. Spread betting and contracts for difference also involve leverage, but the ownership part of the bargain can (hopefully) be offset quickly. For decades banks have been keen on interest rate swaps, precisely for the same reasons. Leasing involves no real ownership, just the cost of carry, as do equity release mortgages.

Then there are far more nefarious schemes which often aim to cover up money laundering and sanctions busting. These are in use today.