Asian investors taking key role in derivatives market

By Christopher Fix Source:Global Times Published: 2018/6/3 19:23:40

Illustration: Xia Qing/GT

Asian retail investors are increasingly flexing their muscles and becoming important participants in the derivatives market. Chicago Mercantile Exchange (CME) Group's retail trading volume has risen by 40 percent from 2015 to 2017, with the top three traded products in Asia Pacific being crude oil futures, E-mini S&P 500 futures and gold futures.  Over the past two years, nearly half of all retail clients acquired globally by CME Group have been from Asia Pacific, signifying that interest from traders in this region is on the rise.

The growth of retail participation in the futures and options market in Asia Pacific is partly a result of road shows and education efforts by various derivatives exchanges to demystify derivatives trading, leading to heightened awareness. At the same time, the strong risk appetite among retail investors as well as an increasingly cash-rich middle-class, who are familiar with futures and options trading, has further contributed to the growth of retail derivatives trading in this region.

Trading patterns of Asian retail investors are also evolving, and they are increasingly seeking multiple products to boost return opportunities. Since many of these derivative products have a low correlation to traditional equity and fixed income securities, retail investors look to the futures and options market for diversification with an eye on global investment opportunities for risk management.

Investor education is another key reason for the increased participation of retail traders in derivatives trading. To this end, we launched CME Institute to provide investors with an innovative online platform to learn about trading futures and options. Working with partners across the industry, the online platform offers live instructions, interactive training modules and market research. Through CME Institute, participants also get to learn about numerous trading strategies and can test them out in a simulated trading environment.

In the Chinese mainland, retail investors are always on the lookout for opportunities to capture short-term movements in the market, and this is reflected in trading activity centered around benchmark contracts where liquidity is concentrated on the front-month contracts, compared to the longer-dated ones. This, coupled with the absence of foreign market participants and the dominance of speculators means that the local market is not as widely used by producers and end-users to hedge risk. As the likes of Chinese steel mills and commodity producers increasingly awaken to the need and benefits of hedging, they may find it increasingly difficult to fulfill their needs for longer-dated contracts on their local markets. Global exchanges fill this important gap with their trading platforms enabling investors to meet their hedging needs around the clock.

Trading within Asian hours (defined as 8am to 8pm, Beijing time) has also grown in importance, in tandem with demand for derivatives trading in the Asian time zone. Most recently on February 6, 2018 after the Dow Jones Index plunged close to 5 percent overnight, we saw around 11 million futures contracts traded on CME Group during Asian trading hours even before the US market opened. 

With continued and increasing education, coupled with the realization by investors of the need to use futures to hedge their physical positions, futures trading is expected to continue to gain traction and further prominence in Asia. As retail investors continue to grow in sophistication and start to put more emphasis on longer-term fundamentals, trading depth will extend beyond the short-term and benchmark contracts. This will benefit investors and the markets alike, as increasing volumes lead to greater liquidity, creating a virtuous circle that will add to the appeal of derivatives.

The author is managing director and head of Asia Pacific at CME Group.


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