China’s first options exchange is expected to launch later this year or early next year, and in preparation, U.S. market makers have been working with Chinese trading firms to educate them on the nuances of options market making and trading.
Doug Goldberg, a former options market maker and currently a consultant, spent two weeks in China earlier this year, working with one of the banks that plans to be a market maker once options trading commences on China Financial Futures Exchange.
“The Chinese are looking to launch their options market, and they need a lot of help in training, consulting, and market making,” Goldberg told Markets Media. “It’s interesting to look at a market that’s just starting, and all the challenges and opportunities.”
Options trading was mandated by the Chinese government about three years ago in order to develop investment banking and derivatives trading as part of a push for greater capital market liberalization. China will launch equity index options on the CFFEX and single stock options on the Shanghai Stock Exchange. The move has been welcomed by market participants as providing more investment opportunities and greater access to Chinese assets.
Horizon Software, a provider of front-end trading software, has rolled out an options trading platform for China. The platform, which is available in Mandarin, will provide access to the two exchanges through the Chinese FIX-equivalent standard, and will support options market making as well as Delta 1 and algorithmic trading.
“We’ve had an active presence in China since 2013, and now count more than ten clients, including five of China’s top ten securities and futures houses among our clients,” said Jean-Marc Delfarguiel, Horizon’s CEO, in a release. “China is of great strategic importance for us and we have a China-based team dedicated to our Chinese clients.”
In June, the exchanges held a “competition” whereby market makers could test their trading systems and acumen, according to Goldberg. “The idea is to do what-if kind of trading,” he said. “It provides an opportunity for individual market makers to test their systems and to trade.”
The bank for which Goldberg provided consulted has no experience trading options, and is building its options market making platform from scratch. “We consulted on that software, looking at the risk, market making, and quantitative modules,” Goldberg said. “We worked with their traders on basic options trading. They were knowledgeable about options trading theory but didn’t have practical experience.”
The fact that in China, equities, futures, and other financial markets have been walled off from one another creates all sorts of arbitrage opportunities for options market makers.
“You can see a tremendous amount of opportunity in the markets themselves,” said Goldberg. “There are many different relationships that were out of line for an extended period of time. It enabled us to work with groups to show them how to build systems in order to either not allow those relationships to exist, or if they do exist, to take advantage of them.”
There’s been a lot of debate as to whether these arbitrage opportunities will continue to exist once the options market is launched. “There might be pockets of time where certain relationships will exist that will provide opportunity if you’re an options market maker or even a proprietary trader,” Goldberg said. “But the goal of the exchange is to have all these kinks worked out of the system prior to launch, which is a smart approach. There will be opportunity, simply because it’s such a big market, and if a retail order flow base can be developed, it can be a fantastic area for growth.”
Featured image via Mstyslav Chernov/Wikimedia Commons
