Options – and the Options Industry Council – Come to China

Jan 28, 2014

(This is part one of an article derived from an interview with Alan Grigoletto, vice president of education at the OIC, and Mary Savoie, the OIC’s executive director. Part two will focus on the options industry in the U.S. and the OIC’s new educational program there.)

The Options Industry Council has been a leader in educating retail investors in the U.S. in options for many years. For the past four years, however, it has been exploring how best to bring options education to China. This year, the effort becomes even more important, as China prepares to launch its first options contracts, pending regulatory approval.

The Chinese have a strong interest in options education, because their retail market is very large, according to Alan Grigoletto, vice president of education at OIC. He recently returned from a trip to China with the OIC’s executive director, Mary Savoie, and Bill Ryan (OIC representative for IntercontinentalExchange | NYSE Options). Working with a consultant fluent in Chinese who helped with the logistics and protocol, they put together a “very aggressive” itinerary for a two-day tour of Shanghai, the world’s most populous city.

The three educators met with the Shanghai Stock Exchange, the China Financial Futures Exchange (CFFEX), and Wo Tai Junan Futures, the fastest growing broker in China. CFFEX launched simulated trading in options in November of last year and plans to launch equity index options referenced to the CSI-300, which tracks the 300 largest companies on the Shanghai and Shenzhen stock exchanges. Shanghai Stock Exchange and Dalian Commodity Exchanges also plan to launch options. The exchanges plan to offer options on commodities as well, Grigoletto said. If all the approvals are in place from the CSRC (the Chinese regulatory body), the Shanghai Stock Exchange expects to be ready to launch options in May of this year, he added.

The OIC also visited Taiwan, where they worked with the Taipei Foundation of Finance in the OIC’s first program ever to train people to be options instructors – named the Train the Trainers Program. This was the first time the OIC has offered instructor training outside of their own organization, said Mary Savoie. The OIC has already been asked to participate in a similar program in Shenzhen later this year.

Most of the people in the classrooms there had advanced degrees and were mathematicians or educators. Around 80 percent had undergraduate or graduate degrees from a U.S. university and were fluent in both English and Mandarin, according to Grigoletto.

“We had them give their presentations both in Chinese and English, and made sure they could expound upon a particular options strategy or risk. It is important to get the right information on options trading to mainland China, because the CSRC is concerned with a bad experience they had with the warrant market in China. They are clearly making a concerted effort to get the right information to their retail audience,” Grigoletto said.

The Pudong region of Shanghai is China’s “Petri dish for full-blown capitalism,” he added. “It is their free trade zone, and there is a mad scramble for people to get inside that free trade zone.”

At least for now, Grigoletto added, China’s government wants to keep the trading within mainland China.

At dinner with some government officials in Shanghai, Grigoletto said he looked out on the vast skyline of the city, which is three times the size of New York, and asked what he would have seen if he had been there 20 years ago, to which an official replied, “You would have seen none of this. Not any of it.”

The official said that in the next 20 years, he expects we will see better air quality, a lower population, and (he hoped) that Shanghai will be a world financial center like Hong Kong, New York, London and Chicago.

Grigoletto said one big difference between the Chinese traders and the U.S. is that one of the questions that came up again and again was “How does market making work?”  

“China’s adoption of options will be order-driven in the initial phases, which is difficult for Chicagoans to comprehend. How do you not have a market maker system when you have x-number of strikes and you have to have guaranteed liquidity on either side of the strike?”

The Shenzhen Stock Exchange, which trades the smaller cap stocks, has said that initially, instead of a multitude of strikes, there will be only two strikes per options class – two up and two down, calls and puts. A typical stock price is already relatively low on the Shenzhen market, so it makes sense that there would be fewer strikes, Savoie said.

Unlike most options traded in the U.S., the China options will not be listed on multiple exchanges; instead each exchange will offer its own proprietary products. The Shenzhen Exchange will list options on small cap stocks, and the Shanghai Stock Exchange will list options on the larger caps.

The Chinese are excited about trading options, Grigoletto said. “Their biggest problem now is getting the education to the investors all across the provinces.”

He said his natural inclination was to do a webinar with subtitles or have the Taipei Foundation of Finance do a webinar. That idea did not get a warm reception, however. Cultural protocols and ceremony are important to the Chinese, he said; they prefer classes to be held in a large auditorium, with the instructors up on a stage.

The OIC has received interest in their programs from several entities, including the China Capital Markets Institute, which is charged with investor education for all of China.

“I think any native of Chicago knows that we’ve seen a tremendous interest in people coming over from China to attend seminars not only at the OIC-OCC but also at the CBOE, the CME complex, trying to get more and more knowledge about our financial markets, so the interest there is just ramping up,” he said. “In fact, no sooner did the wheels touch down for Mary and me than they asked us, when can you come back?”

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