NEW YORK STOCK EXCHANGE -

NYSE
Financial Derivatives


By
Akash Harindranath

Introduction
The New York Stock Exchange (NYSE), sometimes known as the "Big
Board", is an American stock exchange located at 11Wall Street, Lower
Manhattan, New York City, New York, United States. It is by far the world's
largest stock exchange by market capitalization of its listed companies at
US$16.613 trillion as of May 2013. Average daily trading value was
approximatelyUS$169 billion in 2013.
The NYSE trading floor is located at 11 Wall Street and is composed of four rooms
used for the facilitation of trading. A fifth trading room, located at 30 Broad Street,
was closed in February 2007. The main building, located at 18 Broad Street,
between the corners of Wall Street and Exchange Place, was designated a National
Historic Landmark in 1978, as was the 11 Wall Street building.
The NYSE is owned by Intercontinental Exchange, a holding company it also lists
(NYSE: ICE). Previously, it was part of NYSE Euronext (NYX), which was
formed by the NYSE's 2007 merger with the fully electronic stock
exchange Euronext. NYSE and Euronext now operate as divisions of
Intercontinental Exchange.
The NYSE has been the subject of several lawsuits regarding fraud or breach of
duty and was sued by its former CEO for breach of contract and defamation.
On February 15, 2011 NYSE and Deutsche Brse announced their merger to form
a new company, as yet unnamed, wherein Deutsche Brse shareholders will have
60% ownership of the new entity, and NYSE Euronext shareholders will have
40%.
On February 1, 2012, the European Commission blocked the merger of NYSE with
Deutsche Brse, after commissioner Joaquin Almunia stated that the merger
"would have led to a near-monopoly in European financial derivatives
worldwide". Instead, Deutsche Brse and NYSE will have to sell either
their Eurex derivatives or LIFFE shares in order to not create a monopoly. On
February 2, 2012, NYSE Euronext and Deutsche Brse agreed to scrap the merger.
In April 2011, Intercontinental Exchange (ICE), an American futures exchange,
and NASDAQ OMX Group had together made an unsolicited proposal to buy
NYSE Euronext for approximately US$11 billion, a deal in which NASDAQ
would have taken control of the stock exchanges. NYSE Euronext rejected this
offer twice, but it was finally terminated after the United States Department of
Justice indicated their intention to block the deal due to antitrust concerns.
In December 2012, it was announced that ICE had proposed to buy NYSE
Euronext in a stock swap with a valuation of $8 billion. NYSE Euronext
shareholders would receive either $33.12 in cash, or $11.27 in cash and
approximately a sixth of a share of ICE. The Chairman and CEO of ICE, Jeffrey
Sprecher, will retain those positions, but four members of the NYSE Board of
Directors will be added to the ICE board.

Trading
The NYSE trades in a continuous auction format, where traders can execute stock
transactions on behalf of investors. They will gather around the appropriate post
where a specialist broker, who is employed by an NYSE member firm (that is,
he/she is not an employee of the New York Stock Exchange), acts as an auctioneer
in an open outcry auction market environment to bring buyers and sellers together
and to manage the actual auction. They do on occasion (approximately 10% of the
time) facilitate the trades by committing their own capital and as a matter of course
disseminate information to the crowd that helps to bring buyers and sellers
together. The auction process moved toward automation in 1995 through the use of
wireless hand held computers (HHC). The system enabled traders to receive and
execute orders electronically via wireless transmission. On September 25, 1995,
NYSE member Michael Einersen, who designed and developed this system,
executed 1000 shares of IBM through this HHC ending a 203 year process of paper
transactions and ushering in an era of automated trading.
As of January 24, 2007, all NYSE stocks can be traded via its electronic hybrid
market (except for a small group of very high-priced stocks). Customers can now
send orders for immediate electronic execution, or route orders to the floor for
trade in the auction market. In the first three months of 2007, in excess of 82% of
all order volume was delivered to the floor electronically. NYSE works with US
regulators like the SEC and CFTC to coordinate risk management measures in the
electronic trading environment through the implementation of mechanisms like
circuit breakers and liquidity replenishment points.
Until 2005, the right to directly trade shares on the exchange was conferred upon
owners of the 1366 "seats". The term comes from the fact that up until the 1870s
NYSE members sat in chairs to trade. In 1868, the number of seats was fixed at
533, and this number was increased several times over the years. In 1953, the
number of seats was set at 1,366. These seats were a sought-after commodity as
they conferred the ability to directly trade stock on the NYSE, and seat holders
were commonly referred to as members of the NYSE. The Barnes family is the
only known lineage to have five generations of NYSE members: Winthrop H.
Barnes (admitted 1894), Richard W.P. Barnes (admitted 1926), Richard S. Barnes
(admitted 1951), Robert H. Barnes (admitted 1972), Derek J. Barnes (admitted
2003). Seat prices varied widely over the years, generally falling during recessions
and rising during economic expansions. The most expensive inflation-adjusted seat
was sold in 1929 for $625,000, which, today, would be over six million dollars. In
recent times, seats have sold for as high as $4 million in the late 1990s and as low
as $1 million in 2001. In 2005, seat prices shot up to $3.25 million as the exchange
entered into an agreement to merge with Archipelago and become a for-profit,
publicly traded company. Seat owners received $500,000 in cash per seat and
77,000 shares of the newly formed corporation. The NYSE now sells one-year
licenses to trade directly on the exchange. Licences for floor trading are available
for $40,000 and a licence for bond trading is available for as little as $1,000 as of
2010. Neither are resell-able, but may be transferable in during the change of
ownership of a cooperation holding a trading licence.
Call Option
Although premiums received from writing an option may be withdrawn or used as
an offset against requirements on other transactions on the same day, such usage
may result in the loss of equity to an account. An in the money call option could
be sold against a long position in the underlying security, resulting in the
underlying security being valued at the calls exercise value, which is below the
current market value (pegging). In this case, any withdrawal will result in a loss of
equity in the account and conceivably could even result in violation of this Rule.
Accordingly, care should be used before any withdrawals are permitted.
A customer deposits 5,000 shares of XYZ, a restricted security, with a market
value of $100,000 ($20 per share). On the same day, in accordance with
Regulation T (50% loan value) the customer sells short 1,000 shares of ABC for
$40,000 and writes (sells) ten listed call options on DEF at $40 (strike price) at
$500 per option (total premium $5,000).
No funds are withdrawn from the account. At a later date, the market values have
appreciated to $25 per share for XYZ, $50 per share for ABC and $700 per option
for DEF. Based on these prices, the total amount of credit extended on the
restricted security is $12,000, which must be included when calculating the amount
to be deducted from net capital for purposes of determining the member
organizations status under Rule 326.
The above amount is calculated as follows:
Liquidation of short sale of ABC1,000 shares at $50 $50,000
Less proceeds of sale 40,000
Loss $10,000
Short cover value of DEF calls
10 Calls at $700 $7,000
Less Premium held 5,000
Loss 2,000
Adjusted debit balance $12,000

The sale (writing) of listed call options against securities subject to Rules
144 and 145 of the Securities Act of 1933 is permissible. However, any sale
of securities subject to Rules 144 or 145, through the sale of options, will
require that all conditions of the Rules must be satisfied both at the time of
sale of the option and at the time that the underlying security is delivered
pursuant to an exercise notice.
In the case of a call option or warrant on index stock group, the letter of
guarantee or escrow receipt must certify that the custodian holds for the
account of the customer as security for the letter either (1) cash, (2) cash
equivalents, (3)one or more qualified securities, or (4) any combination
thereof, having an aggregate market value, computed as at the close of
business on the day the call is written, of not less than 100% of the aggregate
current index value computed as at the same time and that the custodian will
promptly pay the member organization the exercise settlement amount in the
event the account is assigned an exercise notice
Put Option
The minimum margin on any put, call, currency warrant, currency index warrant or
stock warrant issued, guaranteed or carried short in a customers account may be
reduced by any out-of-the-money but shall not be less than 100% of the current
market value of the option or warrant plus the percentage of the current value of
the underlying component specified
Where a put warrant issued on an underlying currency, index currency group
or index stock group is carried long for a customers account and the
account is also short a registered clearing agency-issued put option, and/or
a put warrant, on the same underlying currency, index currency group, or
index stock group, which short put position(s) expire on or before the date
of expiration of the long put position and specify the same number of units
of the same underlying currency or the same index multiplier for the same
index currency group or index stock group, as the case may be, the margin
required on the short put(s) shall be the lesser of (a) the margin required.
In the case of a put option contract (including a put on a broad index stock
group option) or stock index warrant, the letter of guarantee must certify that
the custodian holds for the account of the customer as security for the letter,
cash or cash equivalents which have an aggregate market value, computed as
at the close of business on the day the put is written, of not less than 100%
of the aggregate exercise.
The term in or at the money means the current market price of the
underlying security is not more than two standard exercise intervals below
(with respect to a call option) or above (with respect to a put option) the
exercise price of the option; the term in the money means the current
market price of the underlying asset or index is not below (with respect to a
call option) or above (with respect to a put option) the exercise price of the
option; and, the term overlying option means a put option purchased or a
call option written against a long position in an underlying asset; or a call
option purchased or a put option written against a short position in an
underlying asset.
Futures on stocks
The futures market is an important concept and can be used to gauge the trend
of the market. The buyer of the contract agrees to deliver the product (or cash
for financial futures) at the contract price on the expiry date. The Standard and
Poor's 500 index (S&P 500) contains many of the largest companies in the
world, so it only makes sense that movement in the direction of the S&P futures
is one of the best indicators of overall short-term market direction.
This rise or decline in the futures contract is usually calculated as a change
from fair value. Fair value is the equilibrium price for a futures contract. This is
equal to the spot price after taking into account compounded interest
and dividends lost because the investor owns the futures contract rather than the
physical stocks. This price is determined over the period of the futures contract.

The main reason that S&P futures are so popular for detecting strength is
because this contract trades 24 hours a day on financial exchanges around the
world. It allows traders and brokers to gauge the futures level before the actual
stock markets open for trading which gives a sense of where the market is likely
trend at the start of trading.


Futures on commodities
Brent Crude is a major trading classification of sweet light crude oil that
serves as a major benchmark price for purchases of oil worldwide. Brent Crude
is extracted from the North Sea, and comprises Brent Blend, Forties
Blend, Oseberg and Ekofisk crudes (also known as theBFOE Quotation). The
Brent Crude oil marker is also known as Brent Blend, London Brent and Brent
petroleum.

Characteristics
Brent blend is a light crude oil (LCO), though not as light as West Texas
Intermediate (WTI). It contains approximately 0.37% of sulphur, classifying it
as sweet crude, yet not as sweet as WTI. Brent is suitable for production
of petrol and middle distillates. It is typically refined in Northwest Europe.

Paper Market Trading



The ICE Futures Europe symbol for Brent crude futures is B.
[6]
It was originally
traded on the open outcry International Petroleum Exchangein London, but
since 2005 has been traded on the electronic IntercontinentalExchange, known
as ICE. One contract equals 1,000 barrels(159 m
3
). Contracts are quoted in U.S.
dollars. Each tick lost or gained equals $10.


Pricing
Historically price differences between Brent and other index crudes have been
based on physical differences in crude oil specifications and short-term
variations in supply and demand. Prior to September 2010, there existed a
typical price difference per barrel of between +/-3 USD/bbl compared to WTI
and OPEC Basket; however, since the autumn of 2010 Brent has been priced
much higher than WTI, reaching a difference of more than $11 a barrel by the
end of February 2011 (WTI: 104 USD/bbl, LCO: 116 USD/bbl). In February
2011 the divergence reached $16 during a supply glut, record stockpiles, at
Cushing, Oklahoma before peaking at above $23 in August 2012. It has since
(September 2012) decreased significantly to around $18 after refinery
maintenance settled down and supply issues eased slightly.
Many reasons have been given for this widening divergence ranging from a
speculative change away from WTI trading (although not supported by trading
volumes), Dollar currency movements, regional demand variations, and even
politics. The depletion of the North Sea oilfields is one explanation for the
divergence in forward prices.
The US Energy Information Administration attributes the price spread between
WTI and Brent to an oversupply of crude oil in the interior of North America
(WTI price is set at Cushing, Oklahoma) caused by rapidly increasing oil
production from Canadian oil sands and tight oilformations such as the Bakken
Formation, Niobrara Formation, and Eagle Ford Formation. Oil production in
the interior of North America has exceeded the capacity of pipelines to carry it
to markets on the Gulf Coast and east coast of North America; as a result, the
oil price on the US and Canadian east coast and parts of the US Gulf Coast
since 2011 has been set by the price of Brent Crude, while markets in the
interior still follow the WTI price. Much US and Canadian crude oil from the
interior is now shipped to the coast by railroad, which is much more expensive
than pipeline.

Delivery dates
In addition to the IntercontinentalExchange, Brent crude financial futures are
also traded on the NYMEX, with the symbol BZ, and have expiry dates in all
12 months of the year.
Brent Index
The Brent Index is the cash settlement price for
the IntercontinentalExchange (ICE) Brent Future based on ICE Futures Brent
index at expiry.
The index represents the average price of trading in the 25 day Brent Blend,
Forties, Oseberg, Ekofisk (BFOE) market in the relevant delivery month as
reported and confirmed by the industry media. Only published cargo size
(600,000 barrels (95,000 m
3
)) trades and assessments are taken into
consideration.
The index is calculated as an average of the following elements:
1. A weighted average of first month cargo trades in the 25-day BFOE market.
2. A weighted average of second month cargo trades in the 25 day BFOE
market plus or minus a straight average of the spread trades between the first
and second months.
3. A straight average of designated assessments published in media reports.
First month weighted average
This is an average of the cargo trade price prices reported, weighted to include
multiple trades at any one price level. If media sources should conflict as to
how many trades took place at a given price, then ICE Futures will endeavour
to clarify the actual amount of trades through contact with the media sources
and market users, whilst reserving the right to omit trades that cannot be
substantiated to the satisfaction of the Exchange.
Example: Should media sources report the following 25-day trades for the first
month:
Media
Source
(1)
Media
Source
(2)
Media
Source
(3)
Media
Source
(4)
Media
Source
(5)
ICE
Summary
88.46 88.64 88.64 88.64 88.64 88.46
88.65 88.65 88.65 88.64

88.64
88.66 88.66

88.65

88.64

88.66

88.65

88.66
First month weighted average = 88.610
Second month deals plus/minus spread trades
This second element in the calculation produces an implied average price for
the first month of the 25-day market, by averaging the second month traded
cargo prices plus or minus an average of the spread trades between the first and
second months. Trades in the second month of the 25-day market are also taken
into consideration in this second element of the calculation, after having been
adjusted by the size of the differential between the first and second 25-day
months. Trade prices for the second month are averaged in the same way as
above, and the average 1st-2nd month spread value is determined by the straight
average price of spread trades documented by media sources.
Example: Should media sources report the following 25 day cargo trades for the
second month:
Media
Source
(1)
Media
Source
(2)
Media
Source
(3)
Media
Source
(4)
Media
Source
(5)
ICE
Summary
88.51 88.70 88.53 88.51 88.53 88.51
88.53

88.68 88.53 88.68 88.53
88.53

88.68 88.58 88.53

88.70

88.58

88.68

88.70
Second month weighted average = 88.588
Average spread trade prices
Example: Should media sources report the following 25-day trades for the first-
second month spread:
Media
Source (1)
Media
Source (2)
Media
Source (3)
Media
Source (4)
Media
Source (5)
0.04 0.04 0.03 0.03 0.03

0.04 0.04 0.03

0.04

0.04
(6*0.04) + (4*0.03)/10
Average spread trade price = 0.036
In a backward dated market, the average spread trade price will be added to the
weighted average trade price for the second month, in order to construct the
implied first month price level. The spread price would be subtracted from the
average second month price in the event of a contango market. Thus, the second
month weighted average of $88.588 plus the average differential of $0.0362
would give an implied first month price of $88.624.
Intra-day price assessments
The industry media publish 25-day BFOE price assessments throughout
the trading day. The midpoint of each quote is used to calculate an average for
the whole trading day. The trading day is taken from 09:30 GMT (10.30 BST)
19.30 inclusive. Example: Should media sources publish the following quotes
throughout the day for the first 25-day BFOE month, these would be averaged
to give the following results:

Time
GMT/BST
Media
Sourc
e (1)
Media
Sourc
e (1)
Media
Sourc
e (2)
Media
Sourc
e (2)
Media
Sourc
e (3)
Media
Sourc
e (3)
09.30/10.3
0
88.560 88.610 88.550 88.620 88.570 88.610
12.30 88.570 88.630 88.570 88.620 88.560 88.600
14:30 88.580 88.630 88.600 88.650 88.610 88.650
17:30 88.600 88.650 88.620 88.670 88.620 88.650
19.30 88.700 88.750 88.710 88.760 88.700 88.750
AVERAGE 88.628 88.637 88.632
Average market assessment = 88.632


Currency futures
Eurodollars are time deposits denominated in U.S. dollars and held at banks
outside the United States. A time deposit is simply an interest-yielding bank
deposit with a specified date of maturity.
As a result of being outside U.S. borders, eurodollars are outside the jurisdiction
of the Federal Reserve and subject to a lower level of regulation. As eurodollars
are not subject to U.S. banking regulations, the higher level of risk to investors
is reflected in higher interest rates.

The eurodollar futures contract was launched in 1981 by the Chicago
Mercantile Exchange (CME), marking the first cash-settled futures contract. On
expiration, the seller of cash settled futures contracts can transfer the associated
cash position rather than making a delivery of the underlying asset.
The underlying instrument in eurodollar futures is a eurodollar time deposit,
having a principal value of $1,000,000 with a three-month maturity.

The open outcry eurodollar contract symbol is ED and the electronic contract
symbol is GE. Electronic trading of eurodollar futures takes place on the CME
Globex electronic trading platform, Sunday through Friday from 5:00 p.m. -
4:00 p.m. central time. The expiration months are March, June, September and
December, as with other financial futures contracts. The tick size (minimum
fluctuation) is one-quarter of one basis point (0.0025 = $6.25 per contract) in
the nearest expiring contract month and one-half of one basis point (0.005 =
$12.50 per contract) in all other contract months. The leverage used in futures
allows one contract to be traded with margin of about $1,000.

The price of eurodollar futures reflect the interest rate offered on U.S. Dollar
denominated deposits held in banks outside the United States. More
specifically, the price reflects the market gauge of the 3-month U.S.
Dollar LIBOR interest rate anticipated on the settlement date of the contract.