Asian retail investors are increasingly flexing their muscles and becoming important participants in the derivatives market. CME Group’s retail trading volume has risen 40% 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 are from Asia Pacific, signifying that interest from this particular group of 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 various education efforts by various derivatives exchanges to demystify derivatives trading, leading to heightened awareness. At the same time, the strong risk appetite of 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.
Retail investors rising in prominence
We observe that in Mainland China, retail investors are always on the lookout for opportunities to capture short term movements in the market, and this is reflected in trading activity centred 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 the gap with growing importance of Asian hours trading
Global exchanges such as CME Group come in to fill this important gap with the depth and liquidity on its trading platforms enabling investors to meet their hedging needs round the clock. Being a regulated exchange, CME Group is also able to provide investors with reduced counterparty risk, unlike other retail trading venues which may not measure up to the stringent regulatory scrutiny.
Trading within Asian hours (defined as 8am to 8pm HK/Beijing time) has also grown in importance, in tandem with demand for derivatives trading in the Asian time zone. Most recently on 6 February 2018 after the Dow Jones Index plunged close to 5% overnight, we saw around 11 million futures contracts traded on CME Group during Asian trading hours even before the U.S market opened. This is about five times more than what we would normally see on average, with our 2017 average daily volume being 2.2 million contracts during the Asian trading hours. The liquidity available in the Asian time zone means retail and institutional investors alike, can hedge their positions when markets move round the clock.
The depth and liquidity on CME Group’s trading platforms enable traders and investors to capitalize on global events and market movements during the Asian hours as the exchange offers six different asset classes while local competitors’ offerings may be more limited.
In Asia, CME Group also partners with futures commission merchants to make our products available to retail investors. For example, in March this year, we partnered with Kenanga Futures Sdn Bhd to provide Malaysian retail investors with enhanced access to trade CME Group products through Kenanga’s customized online trading solution, available on both desktop and mobile devices.
With continued and increasing education, coupled with the realization by investors on 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.