Playing Footsie

23 June 2005

Last Friday s auction fixed the expiry price for index futures and options contracts at a big premium to where the market had been trading. This meant owners of certain call options realised a 63fold overnight return. No wonder the regulator is interested.

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The UK's Financial Services Authority said it was "looking into" price volatility surrounding last Friday's expiry of June futures and options contracts on the FTSE100 index of UK shares.

The expiry price was set at 5,138.7 points. However, the index traded at 5,091 points just after the expiry price was set and did not reach 5,100 points throughout the day.

Since last November, the expiry price has been determined by an auction of stocks, rather than in continuous trading. The auction is conducted between professional investors over the London Stock Exchange's Sets trading system. It begins around 10am on the third Friday of every month.

In the last auction, several blue chip stocks were traded in heavy volume, at prices above those seen in continuous trading just before the auction began.

On June 16, 1,000 call options were purchased over the FTSE100 index, struck at 5,075 points. These options cost £10,000 but were worth £628,000 on Friday, owing to the high expiration price.

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