NewCreative traders flock to China’s derivative markets, ups risk profile

The rapid liberalisation of Chinese derivatives markets has attracted a new breed of creative traders employing complex trading strategies that can generate quick profits - and an extra dollop of risk - in China’s runaway stock boom.

Brokerages and fund managers are investing in mathematics whizzes and hardware, and moving servers onto trading floors to gain precious microseconds dealing in new options and futures contracts, helping China’s CSI300 index become the world’s most traded equity futures contract in May.

The introduction of new derivative products is intended to help investors hedge risk, but it also gives rise to the kind of sophisticated trading strategies that have made quick-trading "flash boys" notorious in the United States and Europe.

For the most part the strategies and the traders employing them are untested in China, where the derivatives market barely existed five years ago, and slick automated trading strategies can produce horrific crashes when they go wrong.

"Currently, there are many hedging tools in the market, but liquidity and stability is still a problem the hedge fund industry needs to address," Hong Lei, deputy head of China’s Asset Management Association, told an industry forum last month.

"China’s market is highly inefficient, which means it’s relatively easy to produce absolute returns," said Ken Zhu, Chairman and CEO of hedge fund firm Scientific Investment.