With the introduction of stock options, the Shanghai Stock Exchange has launched a new phase of derivatives trading this month, and trader interest has taken off more rapidly than envisaged.
Investors are now able to trade options on the Shanghai Stock Exchange 50 A-Share Index exchange-traded fund. Based on data from the Shanghai Stock Exchange, open interest more than doubled from 8,651 to 20,459 contracts in the first two days. Trading activity increased from 18,843 contracts to 23,436 contracts.
“As China continues on its growth trajectory and financial markets continue to deepen, we should see similar growth in its derivatives markets,” said Ee Chuan Ng, head of China sales at Bloomberg. “If the success of the 50 A-Share Index ETF options on the SSE is any indication, investors expect more stock options to be listed in time.”
He added that for this new hedging tool to positively contribute to a more robust equity market, sufficient liquidity will be imperative. He also indicated the likely pathway for new derivative products to come on-stream in China.
“Market participants we have spoken to expect the launch of the Shanghai Shenzhen CSI 300 (CSI 300) index options. CSI 300 is one of China’s most actively traded indexes,” he said. “Given that many OTC products such as Shark Fin notes are linked to the CSI 300, more options on the index will offer investors a greater range of instruments to hedge with.”
The Shanghai Stock Exchange’s president Huang Hongyuan said at the launch that it didn’t anticipate brisk trading during the initial period after the product’s introduction and anticipated that Chinese investors still needed time to learn about it. He did believe that the move would serve to impel further development of the exchange and lead to further innovations.
The introduction of stock options begins a new phase of growth for mainland derivatives markets and follows in the footsteps of futures trading. Chinese markets have historically lacked a wide breadth of hedging tools that are commonplace in developed market.
As the first standard derivatives product listed on a Chinese stock exchange, the stock ETF options and derivatives market making is new to a market that had been focused on spot securities trading.
The vice chairman of China Securities Regulatory Commission (CSRC), Yao Gang, said that stock ETF options whilst being a mature derivative instrument on the international capital market, was a completely new product in China. It was therefore a potential double-edged sword which could serve as an instrument for risk management but also lead to new risks.
He said that the CSRC would intensify regulation over all processes of the operation of the stock ETF options market, severely crack down on market manipulation and insider trading.