Futures Trading in Computer Chips? a Tough Commodity to Sell

Article excerpt

In the late 1980s, the product development team at the Pacific Stock Exchange thought they had a sure-fire idea: a futures contract for computer chips.

After all, the tiny memory devices were fast becoming ubiquitous, turning up in everything from coffee makers to personal computers. Demand was soaring and suppliers were proliferating, especially in East Asia. All told, the perfect ingredients for a successful futures contract.

"It seemed like a natural. Chip prices were extremely volatile, jumping around from $4 to $30 and change," said Dale Carlson, a PSE spokesman. For most users of memory chips, "there wasn't any particular interest in where they came from, they just needed a reliable supply at a fixed price." That's where futures come in. Futures contracts, which trace their origins to ancient Greece and Rome, were created to allow producers, users, and investors to buy and sell commodities at a specific price on a pre-set date. They allow folks to hedge against the risk that prices will swing sharply up or down. Chipmakers, though, weren't about to concede that their products were becoming commodities like pork bellies and copper. "We had these manufacturers saying, `What do you mean my chips are no better than anyone else's?' " Carlson said. "We got a boatload of press because it was so novel, and we spent a fair amount of time and money. But we could never get the sell side interested." In the face of that opposition, the PSE scuttled what would have been its first-ever futures contract. The idea of an exchange-based chip futures market didn't die though. Both the Chicago Mercantile Exchange and the Chicago Board of Trade explored launching a contract. "We looked at it briefly and dismissed it as unworkable," said Ellen Resnick, spokeswoman for the Chicago Mercantile Exchange. After a more extensive study, the Board of Trade reached the same conclusion. In the early 1990s, the CBOT formed a task force with the Chicago Board Options Exchange to examine the viability of offering futu res and options on DRAM chips, the memory devices that are perhaps the most commodity-like chips of all. After visiting with major computer and semiconductor manufacturers though, several problems were identified, said Jim Borowicz, vice president of product and market development at the CBOT. …

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