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Q&A: FIA’s Acworth shares key findings from survey of global derivatives volume

9 min read

Modern Money

The Futures Industry Association recently released its 2015 Annual Survey on Global Derivatives Volume. SmartBrief chatted with Will Acworth, Senior Vice President of Publications, Data and Research at FIA, to learn more about the survey and the trends it uncovered.

What are the key findings of FIA’s 2015 Annual Survey on Global Derivatives Volume?

The big trend that we saw last year was a jump in the trading volume on Asian exchanges. We collect statistics from about 75 exchanges worldwide and 28 of those are in the Asia-Pacific region. Last year, Asia-Pacific exchanges handled 9.7 billion futures and options contracts, which represents a 33.7% increase from the previous year. That compares with basically zero growth in North America and about 8% growth in Europe. Clearly, volumes in Asia were growing much faster than the rest of the world.

Another development worth noting is that if you look at the share that Asia has of the global market, it is definitely on the rise. In 2015, approximately 39% of worldwide trading activity in listed derivatives took place on exchanges in the Asia-Pacific region. That compares to 33% in North America and 19% in Europe. It is not the first time that Asia has captured the largest market share, but it is clearly a notable development for 2015.

Many of the most actively traded contracts on Asian exchanges are much smaller than their counterparts in Europe and the U.S.  Does that distort the size of the growth trend in Asia?

There is no question that many of the Asian contracts you see in our global rankings are very small when compared to the size of the contracts you see on exchanges in Europe and North America. It is particularly true in the equity index and foreign exchange categories. For example, when you look at the Euro FX Futures contract traded on CME, it is 10 times or even 100 times larger than the FX contracts that trade in places like India. That is something that everyone reading the report should keep in mind. Look at the volume data and remember that the number of contracts that trade on an exchange is just one way of measuring market activity.

That being said, I think the data shows – even if the contract sizes vary –is that many of the exchanges in Asia-Pacific, and perhaps Latin America, are serving a different customer base. The percentage of retail participation in derivatives markets in India, China, Korea and many other countries in Asia and Latin America is much higher than what you see at other major futures exchanges in Chicago, New York London and Frankfurt. In fact, the best comparison would be to look at what you see in the US options markets, which has a lot of retail participation. Options on ETFs, for example, are very popular and very heavily traded in the US and they tend to be relatively smaller in size compared to the index options.

The second thing I would say about that is if you think about how markets in places like India and China are likely to develop over time, that retail component that is so strong right now is likely to draw in other market participants such as institutional investors and professional market makers who will come from within that home market and also from abroad. That is exactly the path we saw develop at the Korean Exchange, for example, and we are likely to see that over time in China, India and other countries.

So, contract sizes in those countries are right for this stage of development, but I wouldn’t be surprised to see them change over time. The KOSPI 200 contract is a good example of what we might see happen with newer contracts across Asian markets. The Korean Exchange introduced the KOSPI 200 and initially it was almost entirely a retail contract. For many retail investors it was a very inexpensive way to gamble on the direction of the stock market. It was priced about the same as a lotto ticket here in the US. For various reasons it became incredibly popular, so popular that for many years it ranked as the world’s more active derivatives contract. The Korean government, working with the exchange, re-designed the contract so it would be better-suited for institutional investors. Among other things, they changed the size by increasing it five-fold. Retail participation went down, but it became a more cost-effective tool for institutional investors.

What trends did the survey find when it comes to commodities trading?

Another big trend we saw in 2015 was the significant increase in the number of commodity futures and options traded on exchanges around the world. When I say commodity contracts, I am referring to futures and options based on energy, agriculture and metals. The total trading activity rose by almost 23% to 4.6 billion contracts in 2015. That is a very rapid rate of growth and what is particularly impressive is that it is not a new trend. Commodity trading volumes have grown in 9 of the last 10 years, including the last 4 years in a row. That growth hasn’t attracted as much attention as the equity-index products or the interest-rate products, but it is now a bigger sector than the entire interest-rate sector.

I should point out that commodity futures and options are not new in any way. It is where this industry started. There were agricultural futures that traded in the US more than 100 years ago and Japan had a rice futures market back in the 1700s. What is new is that it has been growing so rapidly and so steadily over the last decade. There are at least three reasons for that growth.

One is the boom in commodity trading in China that had a huge impact on the overall data. Second, the commodity futures markets are linked to the physical commodities business. That sector of the global economy was not as affected by the financial crisis of 2008-09 as the equity-index products or interest-rate products. The third factor, which is a much more recent factor, is the surge in the volatility of crude oil prices. We’ve seen a big increase in the number of crude oil futures and options traded, but it not limited to those contracts. We’ve seen the volatility spill over into a host of related products such as heating oil and gasoline and even into agricultural products, which believe it or not are often correlated. When the cost of fuel for the tractor or fertilizer rises, it affects the price of the agriculture commodities.

The survey reveals increased activity in what is described as “other” contracts related to commodities. What are these “other” contracts all about and why have volumes increased?

We are in the process of figuring out new ways to think about the “other” category of products because it has become a much bigger part of the overall market. Historically, most of the contracts that we put into the “other” category were based on commodities or indexes or financial instruments that were outside our main categories, which are interest-rate, equity, foreign exchange, energy, agriculture and metals. Previous “other” contracts have been things like futures based on real estate prices or rainfall patterns. Although they are innovative products, in most cases they have not been very actively traded. What has changed is that the three commodities exchanges in China – Dalian, Shanghai and Zhengzhou – have introduced roughly a dozen contracts that are based on various types of industrial commodities like plastics, plywood and glass. These contracts are well outside our traditional categories and they have been growing quite rapidly.

In particular, the plastics contracts have been very actively traded on the Dalian and Zhengzhou exchanges, with volumes rising into the hundreds of millions in 2015. When you are producing plastics, you are tied to the price of oil because that is ultimately what plastics are made from. China has industries producing huge amounts of plastic products that are all around us. We don’t have a lot of visibility into who is trading those futures contracts, so it’s hard to know how much trading is a hedge on price volatility and how much is just speculation. Either way, it is certainly true that China’s futures industry is being very innovative in terms of taking the futures model and applying it to industrial commodities that China is producing.

The issue here is the composition of the market. We’ve seen time and time again where a contract has been introduced and risen rapidly up the rankings. But then that same contract falls back down the rankings just as rapidly because market participants did not have a long-term commitment to using those contracts as a hedge for their risks or as the basis for some kind of investment strategy.

The Chinese futures market is still relatively young and the art of risk management is not fully developed. One of the themes we are seeing in statements from exchange leaders in China and in comments by Chinese regulators is that they want to encourage more institutional participation in their markets. That would ultimately benefit both the markets and the economy by strengthening the price discovery and risk management functions of the futures exchanges.

What impact has all this activity had on exchange rankings?

One of the obvious things is that Asian exchanges are moving up the list of rankings in terms of volume. Ten of the top 20 exchanges are based in Asia; namely India, China, Korea, Japan and Taiwan. Increasing international participation plays a big part in the growth of their volume, but not all. China’s exchanges in particular are driven almost entirely by trading from domestic market participants. One of the things that we can look forward to is as those exchanges open up to international participation, their growth rate can climb higher and higher.

There are a few exchanges that have moved up our ranking table for other reasons. There are two relatively young exchanges in the US that have succeeded in capturing a part of the US equity options market. I am referring to BATS Exchange and the Miami International Securities Exchange (MIAX); both of which almost doubled their volume from 2014 to 2015.