The move by the Nairobi Securities Exchange (NSE) to introduce options is great timing for a number of reasons.
First, financial derivatives are the only financial market sector currently enjoying tremendous growth. As at the end of last year, the number of derivatives contracts traded on the exchange (including options and futures) reached its highest level in the past three years, at 104 billion for options and 30 billion for futures (134 billion for derivatives contracts). traded), according to the World Federation of Exchanges (WFE).
Second, the growing interest in derivatives is mostly driven by options, which are up 89.4 percent (and make up 77 percent of all derivatives contracts traded), according to WFE. It is worth noting that stock index options and commodity options recorded triple-digit increases of 130% and 135%, respectively.
Third, the move coincides with the so-called “rise of retail” as a result of rising digitalization mostly due to the pandemic lockdown.
There is no doubt that today’s global retailers are ready for the next layer of building their portfolios, incorporating options to protect their investments and potentially grow their wealth.
As an asset class, options have evolved from a small category to a major part of the trading ecosystem and are used by people all over the world. But there is one problem. The retail losses associated with derivatives trading are staggering.
A good example of this is a recent study by the Securities and Exchange Board of India, the world’s largest financial derivatives market, noting that retail investors lost a whopping Sh2.7 trillion from futures and options in just three years – that equates to nearly $2.7 trillion. shilling. Total market capitalization of NSE.
The same study showed that only 7.2 percent of retail traders made profits in the financial derivatives sector. In other words, it lost more than 90% money to institutional and foreign investors.
Now, I have highlighted here in the past the need for the regulator to curb excessive leverage to make the industry sustainable. I will not go there today, but rather highlight the need for comprehensive education.
While online forums, resources, and mentoring programs can sometimes provide individual investors with the basics, they need deeper instruction to succeed (especially with options trading).
Usually, if things go well, the return is huge, but in many cases there is no return and investors lose 100% of their investment.
Hence, my call for comprehensive market education to accompany this new market if only to help level the playing field and increase the odds of success for retail investors.
This way, if one wants to trade options, they should be able to prove that they know what they are doing, and that they are sophisticated enough to handle the risks. Otherwise, traders are likely to make mistakes that drain their wealth.
Yes, we have come a long way towards making markets more accessible. Contrast Differences (CFDs), day trading, futures trading, and now options.
It is curious to know what kind of options NSE will unveil; Weekly options linked to the index? Those are zero dated? Options on futures?
Whatever the case, the big question is: What’s the point of all this growth if it relies solely on ignorant counterparties and the gambling tendencies of the trading masses? The least we can do is let them enter the trading ring fully armed with knowledge.
Mwanyasi MD, Canaan Capital
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