Saturday, February 25, 2012

ISDEX futures

Living through the technology bubble in late 1999 and early 2000 was even more bizarre in retrospect as it's literally about as different as the current environment is.  For those that can't recall it or were too young, play with the Web Economy Bullshit Generator for examples of the phrases that inundated the world at the time by the internet companies which saw their stocks go parabolic.

In early 1999, the Kansas City Board of Trade received authorization to trade a futures contract on the Internet Stock Index known as the ISDEX. Obviously KC isn't the ideal place for such an index but the first stock index futures contract was actually the Value Line index which was launched before the CME's S&P 500 contract by a few months.  By 1999, the Value Line itself was barely trading so this was a way for the exchange to branch out a bit and the ISDEX shared the Value Line pit.  The ISDEX is so obscure that barely anything exists about it on the internet anymore but it launched while I was still at KCBT as a clerk just months before heading to Chicago.

For those who do recall those days, here's an early 1999 list of it's components and some old names will bring back memories, CDnow (CDNW), (BCST), @Home (ATHM), Cyberian Outpost (COOL), Geocities (GCTY), Inktomi (INKT), Lycos (LCOS), USWeb (USWB), Excite (XCIT) and not included in the list they threw in Etoys later in the year.  And to think, AOL at the time had a market cap of 80+ billion and now it's worth only 1.7 billion, however Amazon was 'only' worth 18 billion then and 81 billion currently. 

To aid liquidity the KCBT issued permits which allowed trading in the ISDEX but only a small amount were ever purchased.  On the floor, the ISDEX was referred to as they "Izzie," i.e. "8 bid Izzie." When the launch occurred there was really only one deep pocketed market maker in the pit and thus it was doomed from the start without any order flow.  To use the tagline from the Roach Motel trap, you could check into the contract but couldn't check out so the only way to hedge was either in the cash market or against the CME's NASDAQ-100 contract.  That said I have a lot of respect for the one market maker who did step up and put a lot of his money on the line to try and get the contract going.  There was only one instance I can recall where outside paper really came in and it was clear they were doing an arb against the cash market.

I can't find any volume figures on the internet about the ISDEX but from what I recall it was dead shortly after launching w/out much volume as mentioned.  The index itself however had a wild ride as referenced in this academic paper:

"By March 1, 2000, Internet firms had a combined market value of $1.7 trillion, reflecting a spectacular rise in stock prices: between January 1999 and February 2000, the Internet Stock Index (ISDEX) more than tripled in value.  Perhaps more impressive, however, was the subsequent fall in valuations. By the end of 2000, the ISDEX had returned to its level on January 1, 1999. It fell another 69% over the subsequent nine months, for a total decline of nearly 90%."

Even though the futures were pretty much DOA, the ISDEX futures weren't delisted until January 2003 as the index itself was finally laid to rest and no longer calculated.  As it so happens, both actions were about as close to the bottom of the tech bubble as possible with the NASDAQ putting in the post bubble low just a few months prior.  The chart below is the NASDAQ index w/the green arrow indicating when the contract was delisted, talk about a perfect contrarian play to get long tech!

Although the contract failed to gain liquidity and the market maker lost a decent amount trying to get it going, I have a lot of respect for the effort and for me it brings to mind Teddy Roosevelt's speech from 1910:

"It is not the critic who counts; not the man who points out how the strong man stumbles, or where the doer of deeds could have done them better. The credit belongs to the man who is actually in the arena, whose face is marred by dust and sweat and blood; who strives valiantly; who errs, who comes short again and again, because there is no effort without error and shortcoming; but who does actually strive to do the deeds; who knows great enthusiasms, the great devotions; who spends himself in a worthy cause; who at the best knows in the end the triumph of high achievement, and who at the worst, if he fails, at least fails while daring greatly, so that his place shall never be with those cold and timid souls who neither know victory nor defeat."

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