Korea drives Asian option growth

Turnover in equity index contracts rose by 40% at Asian exchanges in the fourth quarter of last year, according to the latest quarterly report from the Bank for International Settlements (BIS). The Switzerland-based banking body pointed to the rapid development of options trading in Korea as leading the charge.

Daily average trading volumes for the Kospi 200 options contract increased to 3.35 million contracts with a turnover of $148 million for the whole of last year. This was up from 804,270 contracts worth $53.05 million in 2000, according to the Korea Stock Exchange (KSE).

Philip Eme, senior vice-president of futures and options at SG, the investment banking division of French bank Société Générale, in Seoul, attributed the growth to a large upswing in retail use following the development of internet trading last year. “Local investors were just waiting for more possibilities in terms of increasing their trading," he said.

Sung Hee Hong, senior vice-president of the options market department at the Korea Stock Exchange (KSE) in Seoul, agreed, adding that more than 50% of trades now come through the internet. “Investors can now access a [KSE] member brokerage house’s system online and in real-time, and just click to submit an order," he said.

Hong believes the exchange’s September reduction of margin requirements, lower transaction fees, and the high levels of volatility in the underlying stock market following the September 11 terrorist attacks last year, also contributed to increased activity in the options market at the end of last year.

But a greater awareness of risk management - and the benefits of options - has helped the market since the Asian financial crisis in 1997, he added: “I think the fundamental reason is that investors in Korea realise the usefulness of this options contract for managing their risk.

This has led to a growing participation by local institutional investors, such as domestic securities houses, investment trust companies and investment managers, said James Rodríguez De Castro, managing director at Merrill Lynch in Hong Kong. “Right now, they are beginning to recognise that options are a useful risk management tool for portfolio managers to have.

The exchange is currently moving to upgrade its [trading] system to support larger transaction volumes, although Hong believes the market is now close to its peak. “We think the market is close to saturation, and in two to three years the market will eventually reach a peak," he said.