SSE to start stock options trading

Measure set to boost markets' competitiveness

The Shanghai Stock Exchange (SSE) will start a stock options trial program on February 9, a move that will boost financial innovation and improve the mainland capital markets' competitiveness, analysts said Sunday.

Investors will also be able to buy and sell options on an exchange-traded fund (ETF) that tracks the 50 biggest yuan-denominated stocks in the SSE, the China Securities Regulatory Commission (CSRC) said in a statement on Friday.

Launching stock trading options is another milestone in the mainland's stock market following the launch of stock index futures in 2010, experts said.

An option is a contract for investors to buy or sell a product at a predetermined price at a predetermined time in the future.

Currently, more than 50 global stock exchanges have launched equity options. Among the 20 biggest securities markets around the world, those in Shanghai and Shenzhen are the only ones that have not launched equity options, according to the CSRC.

The mainland's A-share stock market - combining the Shanghai and Shenzhen stock exchanges - became the world's second-largest in terms of market value in 2014. However, it has lagged behind other major markets in terms of diversification of investment tools, said Dong Dengxin, a finance professor at Wuhan University of Science and Technology.

"With the opening-up of the mainland stock markets followed by the Shanghai-Hong Kong Stock Connect scheme, rolling out more financial derivatives will help attract overseas investors," Dong said.

The CSRC said the trial program could improve capital markets' risk management functions and price discovery mechanisms, as well as diversifying trading products and lowering market fluctuations.

Institutional investors that are eligible for the trial program must hold an aggregate balance of at least 1 million yuan ($160,000) in their securities and cash accounts, and the threshold for individual investors is 500,000 yuan, the SSE said in a separate statement on Friday.

The stock options will cover ETFs and selected listed stocks, according to the draft rules for trading of stock options published in December. But neither the CSRC nor the SSE said when equity options for individual stocks would be launched.

"The regulator has taken a cautious approach to developing financial derivatives, as such products can be used for hedging risks but can also amplify risks by allowing speculators to add leverage to their investment portfolios," Dong said.

Yang Delong, chief strategist with China Southern Asset Management Co, said individual investors will be more interested in the single-stock options, an investment tool that is similar to warrant trading.

"The trial program is not likely to attract many retail investors at the primary stage as they lack understanding about how an ETF works," he said. "But when the equity options for individual stocks are launched, more will join in."

The mainland's warrant market became the world's largest in trading volume in 2006 after less than two years of operation as speculators swarmed in, resulting in huge gains for some individual investors and heavy losses for others. The market cooled down after stricter conditions were placed on new warrant issues in 2008.

Analysts from Haitong Securities said options trading is unlikely to see a repeat of the chaotic warrant trading episode nearly a decade ago, due to differences in trading and regulatory rules.

With the introduction of market makers in stock options and a batch of rules on risk management, excess speculation will be curbed, they wrote in a research note released on Friday.