The rapid rise in retail trading in the Asia Pacific region is presenting both challenges and opportunities for derivatives exchanges, said panelists at the FIA Asia Derivatives Conference on 30 November.
While exchanges are seeing a significant rise in retail trading volume and open interest in futures and options contracts on their platforms, they also must navigate differing local regulations and ramp up their technology to cater to this segment, the panelists said.
“What we are seeing is that 50% of the global retail book we currently have at CME globally sits in Asia Pacific,” said Russell Beattie, head of Asia Pacific at CME Group. “Retail is an incredibly important part of the ecosystem and with the rising middle class and the sophistication of retail investors in Asia, it is only going to continue to grow. It’s a significant opportunity for all of us in the room here.”
Speaking on the same panel, Sriram Krishnan, chief business development officer at the National Stock Exchange of India, shared some statistics on the scale of retail trading in India that his exchange is seeing.
“In India, we used to have about 4 million investors back in the days when we set up. Today, we have 80 million unique investors trading on the NSE platform. Since the Covid pandemic, we've been seeing about two-and-a-half to three million retail accounts being opened every month. At this rate, we’ll be adding about 20 to 30 million accounts every year,” Krishnan said.
With this rise in retail trading comes a focus on scaling up the trade processing technology among exchanges. NSE's Krishnan said his exchange is now dealing with huge numbers of order messages coming from electronic trading systems.
“If you look at the volume of transactions and order messages, we receive about 22 billion order messages daily. This is all coming in during the six hour and 15 minute trading window. There are about 220 million confirmed trades every day. All of this points to the fact that the advent of technology-oriented operators and traders – high-frequency traders, prop traders and retail platforms that have deployed technology in a new way – means we have to be prepared for a different scale altogether,” he said.
“As an exchange, we cannot slow down, let alone shut for a small amount of time. We must be able to operate at the same speed or better all the time, and we have to be ready to take on another few billion transactions as they occur. Our technology architecture must be ready for it,” Krishnan said.
Younger generation
Research shows that many of the new breed of retail traders are young and more likely to rely on social media for research and trading tips. This is a trend that Denise Huang, senior vice president at the Taiwan Futures Exchange, said she was seeing.
“One thing we have observed is that more than 50% of account openings at TAIFEX are coming from a younger generation, aged under 40. This generation tends to be more interested in new products, particularly innovative products, and because they may not have a lot of funds, they tend to try our smaller contracts,” Huang said.
“These smaller individual investors bring up the liquidity, but there are also educational concerns from regulators. So while we are seeing more smaller individuals, we are also enhancing our education to them,” she said.
Offering a Japanese perspective on retail trading, Matthias Rietig, senior officer and chief representative, Singapore branch at Osaka Exchange-JPX, said he sees both challenges and opportunities for exchanges. The introduction next year of the NISA (Nippon Individual Savings Account) regime, a new type of tax exemption program for small investments, presents opportunities, but competition to attract those investments is heating up.
“The retail sector in Japan is very advanced and competition is fierce. We are seeing signs, like in the US and Europe, of fragmentation. Exchanges always like to think they should be the only point of price formation,” he said. “However, this can be an opportunity as well, where we’re looking at how we plug into the end users more effectively.”
Product development
The rise in retail trading is also leading to blurred lines when it comes to product development, NSE’s Krishnan said.
“Products used to be constructed for different segments, where we thought about certain products as not really being suitable for retail, more for institutional. Today that divide is disappearing, and products can be constructed for every type of investor because there is an algorithm that can do all of that,” he said.
“The platforms that we have seen in India, several of the fixed income platforms, for example, are able to construct fixed income products for retail investors in a customised way. It’s a world full of opportunities in that sense and it can take the investor journey to a very different level.”
