The best of both worlds. (Exchange-Traded Funds).

When it comes to futures on exchange-traded funds (ETF), only one word comes to mind, actually one letter times three -- QQQ. Ever since the Commodity Futures Modernization Act (CFMA) was passed lifting the ban on single stock futures, Nasdaq Liffe Markets (NQLX) was angling to claim its share

From the announcement of the NQLX venture, the new entity made it clear it would look to trade the index in one form or another. As the main competing exchanges jostled for position, different approaches to the new series of instruments emerged. OneChicago made a commitment to creating narrow-based indexes, and NQLX favored futures on ETFs. As the launch approached, both sides refused to cede either market, though they both had made a strategic decision where they would put their respective priorities.

NQLX and OneChicago have made the most news of all the exchanges, but that is partly due to them having nothing to trade until 30 days after regulators placed final rules on the Federal Register. The American Stock Exchange (Amex) and electronic communication network Island, parent to the Island Futures Exchange, are busy trading their equities and equity options while working to offer these new products. Both are looking to offer futures on ETFs and have a history of trading in the underlyings. Amex offers the majority of ETF products and dominated trading in them until upstart Island surpassed Amex in QQQ and Diamond volume recently. It is a fair bet that both will make a priority of offering ETF futures. Both Island and Amex made splashy announcements when entering the security futures products' fray but have let NQLX and OneChicago fight the daily battle of one-upmanship.

There is a question as to how the competition in these products will play out, considering they are both a futures and a security. In the futures world, first has almost always won. But recent history on the securities side indicates a calculating competitor can steal the franchise of a snoozing opponent. Island's gain over Amex is one example. Also, the International Securities Exchange has become the third-largest equity options exchange in less than two years of operation and in recent months has outpaced the top two exchanges in options commonly listed.

"We don't believe that there is a first-mover advantage in this process," says Chris Concannon, vice president and special counsel for the Island Futures Exchange.

A lack of first-mover advantage is why both Island and Amex aren't pushing to be trading from day one. Island is targeting a fourth-quarter launch but acknowledges that first-quarter 2003 may be more likely, and Amex has moved its target to first-quarter 2003. Concannon says Island doesn't want to be the first mover because it wants to come in later and beat the competition on price. "We obviously have an interest in trading futures on ETFs," Concannon adds.

The lure of lower overall transaction cost for heavy-volume day-traders is one possible advantage, Concannon says.

"Our customer base would like to trade single stock futures on these products," Concannon says. "Everyone's speculation is that [transaction costs] will be lower." He estimates that competitors can offer futures on the ETFs cheaper than the Chicago Mercantile Exchange's customer rate of $1.70 a round turn for its mini index products. Contract size however, will play a role in determining actual cost. A 100-share QQQ futures, which Amex will offer, will have a notional value of $2,500.

Amex plans to trade security futures on the 100 most active optionable shares. The QQQ will be on that list, says Steve Ciccarello, Amex vice president of options products. Ciccarello says the advantage of futures on ETFs will be physical settlement and that they can be held in a securities or futures account.

Island says it is looking at all ETFs, especially QQQs, Spiders and Diamonds. Concannon says many end users believe competition from futures on ETFs may reduce the execution cost of the outright futures contracts.

While NQLX expects to have a product based on the QQQ, it is not a product they list as being available at launch. "We are working on it but haven't finished the process," says NQLX CEO Tom Ascher. While contract specs are in the works, Ascher says a licensing agreement would have to be worked out with Nasdaq before an exchange could offer futures on the QQQ.

RELATED ARTICLE: TOP OF THE CLASS

Confused about where to start? Here are the top 10 ETFs by average daily volume for the past 12 months. These are the few that are most likely to become the underlyings of futures and the ones traders will be anticipating to trade.

1. Nasdaq 100 Trust Shares (QQQ)

2. SPRD Trust Series I (SPY)

3. Diamonds Trust, Series I (DIA)

4. Merrill Lynch Semiconductor HOLDRS

5. Merrill Lynch Biotech HOLDRS

6. iShares Russell 1000 Growth Index Fund

7. iShares NASDAQ Biotechnology Index Fund

8. Merrill Lynch Market Oil Service HOLDRS

9. MidCap SPDR Trust Series I

10. Select Sector SPDR Fund-Technology

Source: Nasdaq