Shanghai’s Nasdaq-style Star Market to launch options trading linked to ETFs, giving investors hedging choices against volatility
- The Nasdaq-style US$955 billion Star Market is preparing for options trading under the guidance of China’s market regulator
- Hedging demand for Star Market-traded stocks is on the rise as the volatility of its benchmark remains elevated after speculators exited artificial intelligence trades
The Shanghai Stock Exchange unveiled plans to launch options linked to exchange-traded funds (EFTs) in the Nasdaq-style US$955 billion Star Market which will offer investors a hedging tool against volatility in China’s second best-performing equity benchmark this year.
The exchange will prepare the ground for options trading under the guidance of the China Securities Regulatory Commission (CSRC) in an important measure to support China’s tech innovation strategy, the Shanghai bourse said in a statement. It did not provide a timeline for the launch.
An option, is a contract that gives the buyer the right to buy or sell a security such as an ETF at a predetermined price within a specific time frame. ETFs, which invest in a basket of securities like bonds, stocks or currencies, offer investors less volatile and more diversified ways of buying liquid, tradeable assets by taking a macro approach to investing.
Hedging demand for Star Market-traded stocks is on the rise as the volatility of its benchmark remains elevated after speculators exited artificial intelligence (AI) trades spurred by the launch of ChatGPT amid a mild economic recovery.
The gauge has lost 12 per cent from its eight-month high struck in April. Still, it has gained 6.9 per cent this year, beating almost all benchmarks that track mainland stocks. Only Shanghai’s Composite index, with a 7.2 per cent gain, has performed better.
The CSRC said options trading will be conducive to the long-term asset allocation to the Star Market and meet investors’ needs for diversified trading while enhancing risk management.
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The option will be linked to the underlying ETF that tracks the Star Market 50 index of the biggest 50 stocks on the tech board, adding to the seven existing option products trading on the Shanghai and Shenzhen bourses.
“The new product has filled the void in hedging the Star Market 50 index and relevant ETFs,” said Jiang Qin, an analyst at Citic Futures, which expects the option to start trading in about two or three weeks. “It’s of significance in optimising the product range and functions in China’s capital market and strengthening the capability of serving the real economy.”
The Star Market 50 index has gained 2.5 per cent since its launch on December 31, 2019. Its biggest constituent is Semiconductor Manufacturing International Corp, China’s biggest chip maker that is capitalised at 425.7 billion yuan (US$61 billion) and software company Beijing Kingsoft with a market value of 204 billion yuan, the second biggest. Shanghai exchange’s tech-focused Star Market, set up in July 2019 as a pilot field for reforms of China’s capital markets, hosts 519 companies which have a combined market value of 6.65 trillion yuan.
China is rolling out more derivative products in its three-decade-old capital markets after overseas investors highlighted the lack of hedging tools as a key hurdle to investing in the world’s second-largest economy.
