Boc Hong Kong

Geared derivatives buck trend

PUBLISHED : Friday, 21 October, 2011, 12:00am
UPDATED : Friday, 21 October, 2011, 12:00am


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While the Hong Kong stock market continues to yo-yo, business in exchange-traded derivative products has reached record high volumes as speculators load up on their bets.

The Hang Seng Index has lost 19.65 per cent since the beginning of this year, treading on bear market territory.

Liquidity flowing into Hong Kong shares has been thinning since August while turnover in callable bull/bear contracts and listed warrants shot up on Wednesday to 41.37 per cent of the total stock turnover, the highest recorded since February 2008.

Yesterday's total turnover of Hong Kong stocks was HK$52.8 billion, down 25 per cent from the average daily turnover for securities listed on the main board and growth enterprise markets for last month.

Meanwhile, turnover of derivative products yesterday declined slightly from Wednesday to 36.2 per cent of the total stock turnover, amounting to HK$19.1 billion.

Long-term equity investors such as retirement savers and mutual funds have either cashed out or stayed defensive.

Brokers said the majority of trading on Hong Kong stocks and derivative products now came from speculators who had no long-term interest.

Callable bull or bear contracts, which are geared derivatives linked to a single stock or index that enable the buyer to speculate if the underlying stock or index is going up or down to a level pre-set by the seller, are increasingly popular.

They are leveraged products because buyers only need to pay a fraction of the value of the underlying stock for the contracts.

But one additional risk with them is that they can be terminated by the seller if the price of the underlying stock or index goes above or below a certain call price.

The gearing of these products can be as high as 30 times, according to Simon Yung, head of warrant sales at Standard Chartered Bank,

According to investment banks, which have been buying and selling these leveraged contracts listed on the exchange, hedging costs of these products are now bigger mainly because of greater volatility. Many of the banks continue to take the associated risks of marketing the products because of their popularity among day traders.

Traders said that the range that was written in the contracts for the termination of trading had also narrowed in recent weeks, which means the risks of losing everything have risen significantly.

'These products are fast, cheap and readily accessible,' said Alex Wong, a director of Ample Finance Group.

'Nobody is looking beyond the next six months. You probably want to get your trades executed in two hours.

'I can see the trading volume [of callable bull/bear contracts] going up given the uncertainty ahead. Yes, you'll lose everything. It's just like playing mah jong - you're in for four rounds and then you're out.'