THE four market makers which trade options on the recently opened Hongkong options market are being criticised by fund managers for hindering its development through the alleged operation of an unofficial cartel. Users of the Hang Seng Index options market, which has been operating for just six weeks, say they have been put off by finding that they were being offered similar prices for most transactions. Trade is also being discouraged by the unpublicised decision last week to allow traders to effectively double their spread between buying and selling prices. But a spokesman from one of the four companies which make the market in the options - Cresvale, Peregrine Derivatives, SBC Derivatives and Rotec - rejects the suggestion that they have an agreement on prices. A manager for Peregrine Derivatives, one of the four, said he hoped traders did not discuss prices, but added: ''There are only four registered traders on the floor so we can't stop them talking.'' Mr A.J. McNally, director of Cresvale Futures, denied any collaboration, saying it would be ''unethical and illegal''. Mr James Vinall, equity derivatives salesman for SBC Derivatives, said: ''I would completely dispute the fact that there is a cartel.'' The fourth company, Rotec, was not available for comment. Customers of the market remain unconvinced. Mr Steve Diggle, options specialist for Baring Securities, said he thought ''cartel prices'' were being quoted. ''We might just as well have one trader as one price is all you get.'' ''It is an unofficial cartel,'' agreed Mr Simon Gard, options consultant for HG Asia. ''If you go down there and ask for a price they all give you the same price. It's a bit of a shame because they started quite well.'' Although only four companies make a market in the options, many securities companies are involved in the new market. They believe the new instruments should improve Hongkong's image among risk-averse investors. Daily trade so far has been intermittent, but an equivalent turnover of $1 billion is common. Now, the issues of the similar price and widening spread are raising fears that the initial interest will be choked. Ms Virginia Mumford, manager for options and product development for the futures exchange, admitted complaints had been made about a lack of competition among the four companies. The key component of the price of an option is the market maker's view of the likelihood of the market moving, known as the implied volatility. ''At the moment most of the market makers have similar views on the implied volatility,'' Ms Mumford said. However, she said new market makers would come to the trading floor which would increase the chances of different prices emerging. She could not say when these new players would begin operating. The futures exchange increased the maximum spreads last week after a short, sharp campaign by the four market makers. Options priced at more than 100 outside the current month can now have a 20-point spread. Cresvale's Mr McNally said investors wanted to know about the price at which large trades could be done, and the widening of the maximum spread would not damage the market. Market makers say their ability to create a liquid market is being hampered by the inability to short sell stocks and the different time cycles of the futures and options exchanges, which means they may be trading in options without being able to hedge with a futures contract. For investors wanting to roll an options position from April to May, traders are now asking for a spread that amounts to as much as 20 per cent of the option's value, for a trade which involves little apparent risk. There are worries that few investors have moved their options into May, which would be the strategy of investors using options for risk management rather than speculation. The April series has only seven trading days before it becomes the first options series to expire and has a gross open interest of 4,848 as of Monday's close, the last day for which exact figures are available. The May series had a gross open interest of 688 at Monday's close. Ms Mumford said this might be because of special factors such as the Sino-British talks being scheduled to start on April 22 and investors wanting options covering this period and no further.
