Trading Of Equity Derivatives More Active In Hong Kong Than Overseas

by Mary Swire, for LawAndTax-News.com, Hong Kong

27 June 2006

The growth in the trading of listed equity derivatives is in general more active in Hong Kong than in overseas markets, according to a new research by the Securities and Futures Commission.

This study follows a previous SFC study which showed that HSI stocks and Mainland stocks that were also listed in the UK and/or US had their trading concentrated in Hong Kong.

The latest research finds that of the only stock option class (on HSBC) that was traded in Hong Kong, the UK and US, Hong Kong accounted for 62% of turnover in the first four months of 2006. Another nine stock option classes (all on Mainland stocks) were traded in Hong Kong and the US. With a market share of 58%, seven of them were more actively traded in Hong Kong. This was a reversal from a year ago when a majority of them saw more active trading in the overseas market.

The trading of listed derivative products depends primarily on the trading activities of the underlying stocks because an active cash market is essential for investors to price and hedge the derivatives. In order to maintain active trading in listed equity derivatives, it is therefore important for Hong Kong to promote active trading of the underlying stocks in Hong Kong.

In addition, the popularity of the derivative products in a certain market and the familiarity of investors with a certain industry or sector also affect trading interest, according to the research.

It is considered that recent measures to improve the efficient functioning of the markets (e.g. narrowing of trading spreads of underlying stocks and relaxation of position limits) may have contributed to the recent increase in the trading of stock options.

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