Derivatives Spot:Market dynamics to shift in 2H

三星证券公司 Gyun Jun，Trisha Sung


　　Over Jan-Feb 2012, Kospi 200 futures trading averaged only 0.234m contracts per day,31% lower than the 2011 daily average of 0.341m, while the average trading valueslipped 20% y-y. The biggest contributors to the plunge were the proprietary tradingdesks of securities firms, which traded an average of only 0.076m contracts per day (vs0.138m contracts per day over Jan-Feb 2011). Volatility increased over the same twomonthperiod as VKospi growth rose to 22.9% from 17% in 2011.

　　In our view, the drop in index futures proprietary trading by securities firms wasprompted by a contraction in the ELW market—ELW issuers/liquidity providers (LPs)typically use index futures to hedge against risk. With both ELW issues and marketliquidity in decline, hedging by LPs also dropped. Furthermore, with a third round ofELW market reforms expected to further restrict LPs from this month, we expect afurther decline in ELW hedging using index futures.

　　Starting this month, the contract multiplier for Kospi 200 options should jump in stagesfrom KRW100,000 to KRW500,000, a level that the multiplier for all products shouldreach beyond Jun 15. We expect the increase to shrink trading volume (mainly in theretail investor segment), reduce liquidity, widen the bid-ask spread, and reduce marketdepth.

　　A router connecting member firms' front-end processing (FEP) system to the KRXderivatives settlement system will be set up in Busan in June—adding to the one inSeoul that has so far processed orders and provided price information. Beginning inJune, member firms will be able to choose between Seoul and Busan routers to transmittheir orders. The Busan router, which is physically close to the KRX derivativessettlement system, would appeal to investors sensitive to order processing speed.

　　The Kospi 200 futures and options markets should undergo a transformation this yearfollowing a reduction in proprietary trading by securities companies, establishment of aBusan router, and an increase in contract multiplier for index options. We expect adecline in trading by proprietary desks (at brokerages) and individual investors, whiletrading by foreign investors increases. The Kospi 200 futures/options market couldtherefore show polarization between low-touch and high-touch traders. If an oligopolyemerges involving certain players, the cost of maintaining the market system could rise.