Index Trading in Japan Worries U.S. Analysts

NEW YORK —  The introduction of stock index futures in Japan on Saturday adds another element of uncertainty in global stock market trading still unsettled from the October crash, traders and analysts say.

“Nobody has any idea how liquid the futures market (in Tokyo) is going to be, so you could have the tail wagging the dog,” said Sam Hunter, senior vice president and equity trader at Drexel Burnham Lambert Inc.

Some fear that the Nikkei 225-share index futures could contribute to a violent selloff in the Tokyo market, which went through the October crash less damaged than Wall Street, where futures trading is prevalent.

In remarks prepared for delivery in Japan, Leo Melamed, chairman of the executive committee of the Chicago Mercantile Exchange, said criticism of stock index futures has been “unfounded and nonsensical.”

But Hunter said the onset of stock index futures trading could hurt share prices. If, for instance, Japanese speculators sell futures because the stock markets are high, then futures can be bought cheaper than stocks, which would inspire arbitragers to dump shares and buy the futures.

Demand for Futures May Be Pent Up

A decline in Tokyo stocks could easily lead to falls in other markets around the world.

“The first couple of weeks might be quite volatile there,” Hunter said of the new stock index futures trading.

Another trader said he is worried that because U.S. markets will be closed on Monday for the Labor Day holiday, American traders could arrive at work Tuesday and find “a major markdown of U.S. stocks” due to selling in Asia and Europe. But he added that the worry could be for nothing because “no one is going to bet all their marbles on a brand new market.”

There are two reasons, Hunter says, why there may be a pent-up demand for stock index futures in Japan. Japanese corporations tend to own big blocks of stock in other companies and traditionally are reluctant to sell this stock.

Secondly, many Japanese executives are not allowed to sell stock in the companies they work for until retirement, he said. The two factors tend to dampen volatility in the equities markets. But futures trading might upset this calm.

A trader at a big U.S. firm predicted that the Japanese stock index futures could start out very actively for four or five days, and then cool off. “I don’t think there will be as much arbitraging as people think,” he said.

But he said some U.S. firms may apply their sophisticated knowledge of arbitrage between stocks and futures to work in Japan.

Initially, futures markets will be a haven for short sellers betting the market will decline--and their selling pressure could force futures to decline. Japanese investors, deeply concerned about rising interest rates in Japan, could use the new market to hedge against future setbacks.

In related news, the Chicago Mercantile Exchange on Thursday announced formation of a Far Eastern advisory committee composed of senior representatives of both Japanese and international banks, securities houses, investment banks and money brokering firms to develop its global markets. The CME has exclusive North American rights to the Nikkei 225.