Retail traders more likely to incur losses due to lack of experience or understanding

 

BROKERAGES are seeing a surge in the use of derivatives in uncertain times - a trend that they say reflects a lift in sophistication of retail investors here. But the risks of losses on these products are also higher, and the products are sometimes not well understood.

 

Derivatives markets have historically proven useful for generating gains in economic downturns, especially as investors can take advantage of leverage to boost returns.

 

Benjamin Yeo, head of derivatives dealing at Phillip Futures, told The Business Times (BT): " Derivatives trading allows investors the flexibility to hold short positions and gain from falling prices. The unprecedented volatility earlier this year has presented investors with many opportunities to profit from short-term price movement."

 

OCBC Securities said more clients have enquired about gaining access to derivatives markets over the last few months.

 

" With each crisis, we notice that the public becomes more informed about the various instruments and options they have to manage and grow their wealth," said Keeve Tan, head of futures and foreign exchange at OCBC Securities. " The current group of investors or traders we interact with is a lot more sophisticated compared to those we saw 10 years ago." OCBC Securities registered a 168 per cent increase in trading volumes of over-the-counter (OTC) derivatives in Marchcompared to pre-pandemic times. Trading in exchange-traded derivatives increased 93 per cent.

 

At CGS-CIMB, overall retail volume for exchange-traded derivatives increased 72 per cent, while OTC derivatives was up by 13 per cent. OCBC' s Mr Tan attributed the trading surge to fear in the markets. The CBOE Volatility Index (VIX), often referred to as the fear index, reached a high of above 80 on March 16 - a level not seen since the 2008 financial crisis. Any value under 12 on the VIX is described as " little fear" , while values above 20 are typical of a " fearful market" . The VIX is derived from the implied volatility of options on the S& P 500 index, and rises as options traders price in greater volatility.

 

As the VIX rises, investors and speculators " either seek safe haven assets in a flight-to-safety play, or look to ride on the increased volatility in the markets" , said Mr Tan.

 

Investors have been unnerved by the global spread of the novel coronavirus and a sharp contraction in oil prices as countries started to close their borders, said Franky Ng, CGS-CIMB Securities' regional head of futures.

 

" Each alone would be a massive event in its own right," he said. " Having both (events happen) back to back created a crazy economic storm which almost no investor could avoid."

 

Popular products

 

Equity indices have been among the most favoured derivatives across the brokerages, as investors turn to exchange-traded derivatives to hedge their stock portfolios. Some of Phillip Futures' popular products are based on the S& P, Dow and Nasdaq indices. The E-mini S& P, for instance, saw a 71.3 per cent month-on-month jump in volumes in March.

 

At OCBC Securities, equity index contracts including the S& P and Hang Seng rose by as much as 157 per cent. CGS-CIMB said that energy contracts, mainly crude oil, were its most popular derivative products. These made up some 57 per cent of total volume from March to June.

 

Gold has also been a favourite. Trading in OTC and exchange-traded gold contracts collectively increased 123 per cent at OCBC Securities.

 

Risky products

 

Investors who want to trade derivatives on platforms regulated by the Monetary Authority of Singapore (MAS) must undergo a customer knowledge assessment. Financial institutions offering derivatives must also implement safeguards to protect inexperienced customers from large losses.

 

Such rules exist because losses from trading derivatives can stack up quickly. Some products incorporate leverage to boost returns. Daily leverage certificates (DLCs), for instance, are structured so that the value of the certificate will rise or fall several times more than its underlying asset.

 

In May, BT reported that a group of investors had lost all their initial investment after the value of their Singapore Airlines (SIA) DLCs fell to zero. The DLC SOCGEN5XSHORT SIA was designed to rise by 5 per cent for every 1 per cent fall in SIA' s share price, and was wiped out when SIA shares rose by more than 20 per cent after they began trading ex-rights. The DLC issuer Societe Generale later made a goodwill payment to the DLC holders, to account for circumstances related to the published calculation of SIA' s theoretical ex-rights price.

 

Derivatives are often traded on margin, meaning the investor only deposits a fraction of the value of a trade with the broker. An investor could buy S$10,000 worth of derivatives, but only deposit a 25 per cent margin of S$2,500. This allows investors to make huge trades - beyond the amount for which they have the cash.

 

Margin trades that go well generate large returns. But when they go badly, the leverage used means losses are multiplied.

 

Checks by BT found that brokerages have seen more margin top-ups following the virus outbreak. Margin calls are triggered when the value of the assets in an account falls below the required margin or percentage. CGS-CIMB said net top-ups were particularly high in March, jumping 60 per cent from February.

 

Phillip Futures has increased margin requirements substantially to encourage clients " to maintain more than sufficient funds" and to " safeguard" investors. In March, when crude oil prices turned negative, margins were increased by 20 per cent for crude oil-related products and selected contracts hit by oil. Said Mr Yeo: " While this (leverage) makes trading derivatives more affordable, freeing up capital to invest in other products, retail investors need to understand that their profits and losses can be amplified, and there is a risk of running into over-loss."

 

Last month, 20-year-old Alex Kearn in Nebraska, United States killed himself because he thought he had lost US$730,000 from his leveraged options trades. Reports said he had likely misunderstood the numbers in his trading app.

 

While many derivatives traders do suffer from heavy losses, such risks have not deterred Shannon Sin, a retail investor who trades options because they allow him to enter the market at a price he deems acceptable in such volatile times. " Selling puts, for example, is a great way to collect premiums while waiting for a counter to retrace," he said.

 

He believes margin calls are often the result of poor risk management and a misunderstanding of the underlying traded counter. " With the increased financial literacy and access to so much information, you can get a reasonable idea of the financial strength and reasons behind substantial movements intraday quickly," he said.

ITOCHU Corporation (headquartered in Minato-ku, Tokyo Masahiro Okafuji, President & CEO hereinafter &ldquo ITOCHU&rdquo ) announced today that it has executed a memorandum of understanding to explore and develop healthcare business opportunities in Asian countries with Lippo Group (hereinafter &ldquo Lippo" ) and its property and healthcare arm Lippo Karawaci Tbk. (hereinafter &ldquo LPKR&rdquo ).

Lippo operates LPKR, the largest listed property company in Indonesia by total assets and revenue, with a unique and integrated business model. This businesses comprise residential/township, retail malls, hospitals, hotels and asset management. Lippo also operates Indonesia&rsquo s premier hospital group, Siloam Hospitals, which operates 26 hospitals, and 16 clinics in 19 cities throughout Indonesia.

In Asia, demand for better healthcare is growing and need for significant investment in hospital and healthcare infrastructure is rising in light of the rapidly transforming society and changing population demographics as over 50% of the world&rsquo s population currently lives in Asia and over 1.3 billion people are expected be over 50 years old by 2025.

Both ITOCHU and Lippo will jointly conduct a detailed feasibility study for the establishment of a joint venture in Singapore to mutually develop healthcare business opportunities including but not limited to the following areas:

1. Collaboration in healthcare areas in Asian countries:
a) investment and operation of clinics, hospitals and other healthcare facilities in
countries such as Vietnam, Myanmar, Philippines, Malaysia, and Australia

2. Collaboration in healthcare areas in Indonesia:
a) development and operation of Japanese-style hospitals in Indonesia
b) investment and operation clinics, hospitals and other healthcare facilities

3. Collaboration in Other Areas:
a) business cooperation opportunities in construction and real estate industries
including the possible investment or involvement in REIT business and hospital construction projects
b) outsourcing of certain medical services which are typically conducted by
hospitals and clinics themselves in Indonesia and Asian countries, and to
establish separate entities to provide such services

OUE Lippo Healthcare said that it has received legal advice and is taking the preliminary view that its subsidiaries have a reasonably strong defence against the claim. The subsidiaries will " vigorously defend" the claim, OUE Lippo said.