At FIA’s Asia Derivatives Conference on 4 December, senior executives from exchanges across the region discussed the rise in trading from retail investors and how they are addressing risk through enhanced education.
For some of the speakers on the panel, up to half of trading activity on their markets comes from retail investors. A rising middle class along with a spread of mobile trading apps and a proliferation of how-to-trade content on social media has contributed to this rise in recent years. All panellists agreed that educating investors on risk management, as well as measures such as price position limits, are of paramount importance for boosting investor protection.
Akira Tagaya, director and senior executive officer at the Osaka Exchange and the Tokyo Commodity Exchange, said he sees increased trading from retail investors in the cash equity market in addition to derivatives, where retail investors generate more than 20% of trading volume.
Japan's equity investor base has grown exponentially in recent months, following an overhaul of the country’s NISA (Nippon Individual Savings Account) tax-free stock investment programme, with aims to turn the trillions of yen held in cash by households into investments in stock markets. In January, Japan’s government raised caps on annual investment amounts and made balances permanently tax exempt up to a certain level, leading to a surge in new NISA accounts.
“The NISA limit was tripled, and 10 trillion yen was invested through 15 million NISA accounts in the nine months this year from January to September, which is four times the size of investment in the same period last year. The Nikkei 225 index has risen by more than 50% in the past two years,” Tagaya said. “In this situation, as an exchange, it is important to think about how to protect and nurture these retail investors and how to keep them involved in the market, which is very important for sustainable growth.”
He added that there are various types of retail investors. With some willing to take risk aggressively while others adopt a more conservative style, exchanges need to tailor their approach to each type of investor.
“For the risk appetite investors, it's important that they don’t take excessive risk in their positions and investments. From this point of view, we have introduced smaller sized futures and options. The Nikkei 225 micro futures and mini options, for example, are one-tenth the size of conventional futures and options,” he said.
“For people who don't like risk, a conservative use of derivatives can increase the effectiveness of their asset management. Education is very important, and we are providing every opportunity for investors to learn about the risks associated with their investment method through web content and simulation sites.”
Other exchanges are taking a similar approach to educating retail investors, such as the Taiwan Futures Exchange and the Thailand Futures Exchange. Speaking on the panel, Chien-Lung Chou, chief executive officer of the Taiwan Futures Exchange, said half of all activity on his exchange comes from retail investors.
“Education and risk mechanisms are very important,” Chou said. “We also offer a simulation system to train retail investors on how to trade and how to manage their risk. For instance, on the simulation system, they will receive a margin call and if they don't deposit more margin, they get liquidated. Our websites teach investors about things such as how to use Greeks in options trading, and they can use the system to play with parameters and create different scenarios, so they learn how to manage their risk.”
Also speaking on the panel, Rinjai Chakornpipat, managing director of the Thailand Futures Exchange, said retail investors account for 45% of activity on the exchange.
“It is essential that we equip investors with the knowledge that they need to trade. We try to protect retail investors, and the best way is to give them tools, so they are able to protect themselves,” said Chakornpipat.
Datuk Muhamad Umar Swift, the chief executive officer of Bursa Malaysia, said he views retail as an increasingly important part of the trading ecosystem and one that the exchange has earmarked for growth.
“We are very much balanced towards institutional, and as a market, we're fairly traditional around real commodities, but we see retail as an interesting segment for growth to provide depth. Of course, we have to be mindful of incorrect pricing signals, but we are focused on growing that investor base,” he said.
“We are running programs that address themes such as volatility, and we offer test provisioning so investors can gain confidence about their strategies. We've also introduced what we call the Futures Trading Apprenticeship Program, or FTAP. In the last cohort, we had a thousand applicants,” he added.
For other exchanges, however, the retail segment does not hold significant appeal.
“For every exchange group, there's a decision to make on how much they want to go into retail versus institutional,” said Maria Levanti, president and COO, ICE Futures Singapore and ICE Clear Singapore. “We are probably one of the least penetrated in the retail industry, although we do have retail participation in contracts like Brent, sugar and the US dollar index.”
“What we are mindful of is how is the price signal affected when you have non-commercial users and hedgers participating in your market. And also, what does it do to the market when you have disparate speeds of trading between institutional investors and retail? But I agree you have to look at education, you have to look at risk disclosures, price position limits, and then you have to have very robust market surveillance and risk management tools,” she said.
“This is not the only way to grow, however. There are other ways to grow that don't necessarily require the involvement of retail in the market. So every group has to make their own decision as to what makes sense for them, and what makes sense from an ROI standpoint.”
