Article published in October 2005 issue of The Journal of Commercial Biotechnology
Taking stock in biotechnology futures
Executive Vice President and Chief Marketing Officer of The
NASDAQ Stock Market, Inc.
and CEO, NASDAQ Global Funds, Inc.
Investors now have a new tool to help them
manage the risk associated with biotechnology
Individual and professional investors can more
confidently invest in companies whose products take
years to develop and potentially several more to gain
regulatory approvals and commercialize.
This paper focuses on the development of the
first stock index futures for the biotechnology market.
Together, the Chicago Mercantile Exchange and The
NASDAQ Stock Market, Inc. have launched an investment
product to help reduce risk and foster greater
confidence in biotechnology investment.
By managing risk in the biotech sector,
Biotechnology Index futures should appeal to a broader
base of investors while offering greater visibility to
biotechs included in the Index.
market and promise for biotechnology often is
characterized by high hopes tempered by the realization
of long product-to-market cycles.
While biotechs tend to be riskier than other
securities within the broader technology sector,
investments in biotech companies have the potential to
provide perhaps the greatest long-term impact on our
lives as both an investment and because of the impact on
our quality of life.
Consider these examples:
Corn, tobacco and rice that synthesize rare human
proteins to literally grow life-saving drugs, such as
plant-based insulin and vaccines for hepatitis B and
cholera. A device that can read neurons firing in the brain of a
paralyzed patient enabling him to “think” computer
commands. Personalized DNA sequencing that enables development of
designer drugs with no side effects.
Mapping the genome of and curing common diseases
like malaria. The good news is that these breakthroughs are but a brief
glimpse of what is, or will soon be, possible thanks to
sustained investment in biotechnology. This investment
is two-fold – investment into companies, themselves,
which in turn leads to increased investment in research
and development. The better news is that investment in
biotechnology has recently become more palatable to a wider
April, the Chicago Mercantile Exchange (NYSE: CME), the
largest futures exchange in the U.S., and The Nasdaq
Stock Market, Inc. (NASDAQ®: NASDAQ: NDAQ)
announced a new way for individual and institutional
investors to manage risk and the uncertainty associated
with biotechnology investment. Through an expanded
partnership, the exchanges will develop new derivatives
contracts, including futures and options on futures
contracts based on the NASDAQ Biotechnology Index®
These new contracts are the first futures
designed specifically to hedge risk in the biotech
sector, and will provide investors an alternative to
other investment strategies, such as biotech-specific
mutual funds or specialist
The new CME E-minitm NASDAQ
Biotechnology Index futures contracts, expected to
launch in September 2005, will be traded exclusively on
the CME® Globex® electronic
Indexes and Futures Defined
index is a group of securities that an Index Provider
selects as representative of a market, market segment,
or specific industry sector.
The Index Provider determines the relative
weightings of the securities in the index and publishes
information regarding the market value of the index.
Stock index futures are contracts to buy or sell
the value of a specific stock index at a specific price
on a specific date in the future. Businesses and
individual traders trade stock index futures for
different reasons, but primarily to try to profit or
protect themselves from changes in the price of the
underlying indexes. Financial professionals, such as
pension and mutual fund managers, typically use index
futures for managing risk and hedging portfolios against
adverse price moves.
from mutual funds or trusts, index futures offer a
broader, representative cross-section of a market sector
and, therefore can increase portfolio stability.
E-minitm NASDAQ Biotechnology Index futures
make getting into the biotech market even easier for all
investors and traders.
Rather than having to pick individual stocks or
companies and hoping to pick correctly, investors now
will be able to trade the entire biotech territory at
once by investing in biotech futures.
For example, suppose an investor wants exposure
to a broad-based index consisting of NASDAQ
His capital is limited; therefore, he normally
would have to limit his purchase to a few carefully
researched and well-chosen biotech securities or the BGI
I-Shares exchange traded fund that tracks this NASDAQ
index. Now individuals, both investors and traders, can diversify
their investments by purchasing CME E-minitm NASDAQ
Biotechnology Index futures contracts.
By essentially investing
in the U.S. biotech market as a whole rather than in a
handful of individual biotech stocks, investors benefit
from even greater diversification.
If a few chosen stocks sharply decline in value
or bust, an investor risks losing his or her entire
biotech index futures, fluctuations in individual stocks
are mitigated by overall market performance.
The CME E-minitm
NASDAQ Biotechnology Index futures contracts will be based on the NASDAQ’s
Biotechnology Index, which launched in 1993 and now
includes more than 150 components.
The Index is managed by calculated under a
modified capitalization-weighted methodology (share price X number of shares outstanding). To
be eligible for inclusion in the Index, a security must
be listed on The NASDAQ Stock Market and meet the
The security U.S. listing must be exclusively on
the NASDAQ National Market (unless the security was
dually listed on another U.S. market prior to January 1,
2004 and has continuously maintained such listing)
The issuer of the security must be classified
according to the FTSETM Global Classification
System as either biotechnology or pharmaceutical
The security may not be issued by an issuer
currently in bankruptcy proceedings
The security must have a market capitalization of
at least $200 million
The security must have an average daily trading
volume of at least 100,000 shares
The issuer of the security may not have entered
into a definitive agreement or other arrangement which
would likely result in the security no longer being
The issuer of the security may not have annual
financial statements with an audit opinion that is
currently withdrawn; and
The issuer of the security must have
“seasoned” on NASDAQ or another recognized market
for at least 6 months; in the case of spin-offs, the
operating history of the spin-off will be considered.
E-minitm NASDAQ Biotechnology Index futures
contracts will be sized at US$50 times the NASDAQ
Biotechnology Index, or approximately US$33,000 at
current index levels, and will have a tick size of .10
index points or US$5.00.
The contracts will trade on the CME Globex
electronic trading platform Monday through Thursday from
3:30 p.m. to 3:15 p.m. ET, and from 5 p.m. to 3: 15 p.m.
ET on Sundays. As previously mentioned, NASDAQ also licenses an exchange
traded fund on the biotech index to BGI (the BGI
I-Shares NASDAQ Biotechnology ETF) which maintains more
than $ 1.1 billion in assets under management and
averages more than 1.4 million shares per day.
With more “retail appeal,” these innovative
new CME E-minitm NASDAQ Biotechnology Index
futures contracts will not only provide new hedging and
risk management opportunities for a variety of investors
worldwide, but also drive direct and indirect visibility
for the many promising biotechnology companies listed in
the Index. That
opportunity for increased visibility can build investor
confidence while greatly improving a biotech’s ability
to attract new and sustain current investments.
And as all biotech companies well know, money is
time – time needed for the critical processes of
research and development, conducting drug trials, and
gaining regulatory approvals.
biotechnology has been one of the most exciting and
potentially rewarding industries for savvy investors.
The launch of new investment options such as the CME E-minitm
NASDAQ Biotechnology Index futures contracts will enable all types of investors to invest and
trade in the biotech sector with new tools.
Index futures also have added benefit to the companies
that are included in the index.
With greater visibility and the opportunity to
tap a broader community of investors and traders, the
pressure on biotechs to quickly commercialize the next
drug or secure that next round of funding may ease so
they can shift more focus to their ultimate business of
improving the quality of our lives, now and in the