Pacific Exchange May List Futures in Computer Chips
Computer chips may soon join pork bellies and soybeans in the world of commodities trading, as the Pacific Stock Exchange announced Monday that it will seek permission to begin trading chip futures in early 1990.
The San Francisco-based exchange said it will file an application with the Commodity Futures Trading Commission within the next two weeks for permission to establish a futures market for chips. The announcement comes on the heels of a similar proposal announced last week by the Twin Cities Board of Trade in Minneapolis.
Dynamic random access memory (DRAM) chips--the kind that store memory for personal computers--would be traded as a so-called hard commodity like the more familiar soybeans, pork bellies and precious metals. Following a wave of new trading in various financial indexes, computer chips would be the first hard commodity to hit the scene since plywood futures were introduced nearly a decade ago.
“This will provide a way for suppliers, users and distributors of computer chips to smooth out the price volatility that has characterized the industry over the last several years,” said Dale Carlson, vice president of corporate affairs of the Pacific Stock Exchange in San Francisco.
Lock in Price
Futures contracts are financial commitments between two parties for the delivery of a specified amount of a certain commodity at a specific date in the future. Contracts can range in value from $10,000 to $1 million, but participants typically deposit only 10% to 20% of the contract’s value. Investors seldom take actual possession of a commodity, but instead are trying to protect a price position.
That is one reason, analysts say, why this could be a significant opportunity for the computer chip industry. Costs of computer chips have fluctuated wildly in recent years. Just four years ago, suppliers suffered considerably when chip costs dropped sharply. Manufacturers in the United States and Japan together lost more than $7 billion, and several large manufacturers went under.
But since 1988, the costs of computer chips have jumped. “Chip futures would work just the same as any other commodity,” said Carlson. “It’s a way of hedging risks and locking in prices.”
Although the Pacific Stock Exchange has trading locations in Los Angeles and San Francisco, trading in chip futures would take place exclusively in San Francisco, Chairman Maurice Mann said in a statement, “because of the city’s proximity to Silicon Valley and its strategic location in the Asia/Pacific Basin.”
The Pacific Stock Exchange is developing the project jointly with Memory Clearing Corp., a San Francisco company with expertise in the semiconductor business that was established a year ago primarily for this venture.
Idea Came After Crash
The 29-year-old president of Memory Clearing Corp., Hoon Tae Won, said the idea of trading chip futures came to him shortly after the October, 1987, stock market crash. “I was standing in the (San Francisco) trading pit reading Doonesbury when the idea suddenly came to me,” he said. “I ran into my office and started phoning other people in the industry as sort of a sanity check.”
The dual trading proposals have put the subject of computer chip futures squarely on the top of the agenda of the Semiconductor Industry Assn.’s annual board meeting next week in Tokyo. The board includes top executives of such companies as IBM and Texas Instruments.
“On the face of it, you think of commodities as fungible things like wheat and soybeans,” said Warren Davis, vice president of the association. “You don’t immediately think of computer chips.”
