London exchange begins trading in options

Press, 29 April 1978, Page 19

London exchange begins trading in options

The London Stock Exchange, Europe’s biggest, has begun a new type of highly speculative dealing, in what is the latest American fashion to have hit Europe.

Its critics have condemned it as a dangerous form of gambling and London’s influential business daily, the “Financial Times,” recently said such trading lent itself

to manipulation, unless cares fully controlled. The supporters of options trading, however, have argued that it could give legitimate spice to an investor’s strategy and provide an excitement that a lacklustre stock market could never hope to match. “The quick route to a fortune — or the fastest way to lose money outside a racecourse? was the way the financial times summed up the controversy over options trading in a recent special report. In the London options market, investors will be able to trade in the right — or “option” —to buy shares in the future. It means for instance that an investor could for a fee buy the right to purchase 4000 shares at the price of $lOO each in six months’ time. He obviously hopes that the shares will actually be worth much more than $lOO on the stock market when his contract matures. If the shares then start going badly and he fears that their price in six months will not even allow him to recoup his fee, he can sell the option and just lose whatever the drop in the value of the “option” lias been, or simply not exercise his right to buy.

One risk comes when one party agrees to sell in six months’ time some shares which he does not at present own and the value of the] shares on the stockmarket meanwhile leaps much higher than the price at which he agreed io sell. Then he has to foot the bill. The launching of the “London Standard Exercised Options Market” follows the inauguration of the European Options Exchange in Amsterdam, on April 4. Options are now also traded on four United States ex- :

changes, and in Toronto and Montreal.

The European experiments on options trading ironically are starting when a clampdown on the growth of this type of dealing has already been ordered in the United States by the Securities and Exchange Commission (SEC). The United States decision was taken because of numerous past abuses, and S.E.C. doubts about whether even bigger markets could be policed pro'perly. Trading will take place on the same floor — although not on the same spot — as where the normal shares are being traded. In London, the board dealers charged with keeping a record of client orders to start buying or selling at set prices will be allowed to trade for their own account.

This has prompted fears that conflicts of interest might arise and that the performance of the normal shares on the stock exchange could be unfairly influenced by the trading in their options. Options trading in London will be limited at first to 10 leading British shares — Imperial Chemical Industries (1.C.1.), British Petroleum (8.P.), General Electrics (G.E.C.), Grand Metropolitan Hotels, Land Securities, Courtaulds, Marks and Spencer, Shell, Consolidated Gold Fields, and Commercial 'Union.

On the first day of trading in Amsterdam this month, 531 contracts changed hands in nine United States, British and Dutch shares.

But small beginnings in options can lead to a much bigger volume. In Chicago only 600 contracts were traded on the first day, five years ago, but on a record day last November this figure had leapt to 216,000.