The Kansas City Board of Trade began buying and selling stock index futures contracts today, opening a new and controversial financial market that could radically alter the world of business.
More than 2,000 stock index futures were traded on the first day, handily exceeding chief executive Walter Vernon's estimate that 500 contracts would be a good day and 1,000 would be exceptional.
Though grand-opening business does not assure long-term success, Wall Street prognosticator Joseph Granville predicted investors would quickly catch on to stock index futures.
"Kansas City will drain money out of Wall Street to play this game," he said.
Kansas City's stock index contract for the first time makes it possible to speculate on the overall performance of the stock market without buying stocks. Index futures also give professional money managers a chance to reduce the risk of buying stocks by using the same techniques utilized by grain dealers who hedge by purchasing wheat futures.
The Kansas City Board of Trade is the world's biggest market for hard, red winter wheat, but first day volume in stock index futures was more than twice its usual wheat business.
Stock index futures work just like contracts for future delivery of wheat, except that the "commodity" to be delivered is a hypothetical portfolio based on the Value Line Index of 1,700 common stocks.
Someone who expects stock prices to go up can buy a stock index futures contract at today's price, hoping to resell it later at a profit.
If stock prices seem to be falling, a speculator can sell Value Line futures for delivery later in the year, in hopes of buying back the contract later at a lower price and making money.
While a Kansas City wheat contract represents a boxcar load of 5,000 bushels of grain, the Value Line contract is for a portfolio of stocks worth about $65,000 at today's prices.
To buy a stock index futures contract, an individual speculator must make an initial down payment, or margin deposit, of $6,500.
The Value Line contract for June delivery closed yesterday at 128.50 up about half a point from the first bid of the day. Each point that the index moves up or down means a $500 gain or loss. Someone who bought a June contract at the opening would be $250 ahead by the end of the day.
Vernon said the first day's heavy volume indicated that commercial money managers are trying out new investment strategies using the Kansas City contract.
When the Commodity Futures Trading Commission approved the Value Line contract last week there were some doubts about whether professional money managers would use it. The Value Line Index is not as well known as such stock market indexes as the Standard & Poor's 500 or the New York Stock Exchange Composite Index.
Kansas City's value line index will be the only stock market futures game to play for several months, until the CFTC acts on more than a dozen other proposals submitted by competing futures markets. The Kansas City Exchange spent more than four years convincing Washington to approve the idea but once regulators began to come around, others submitted their own proposals.
The $6,500 margin requirement was raised from a planned $4,000 at the urging of the Fed.