Derivatives set to expand

The Athens Derivatives Exchange (ADEX) will offer new products and a more attractive pricing structure in 2004. Three new stock futures contracts – based, respectively, on the stocks of EFG Eurobank Ergasias, state lottery company OPAP and the Public Power Corporation – are expected to make their debut in January. ADEX executives plan to add more futures on high-capitalization stocks and are even looking into mid-caps which fulfill the liquidity requirements. The ADEX will also offer options based on the euro/dollar exchange rate, considered more accessible than futures because opening a position is simpler and because options are a lower-risk product. However, the big news of the year, as far as the ADEX is concerned, will be the creation of new, synthetic products – defined as «customized hybrid instruments created by blending an underlying price on a cash instrument with the price of a derivative instrument» – that will offer both professional managers and individual investors an almost limitless variety. A special working group has been created to undertake a study on defining the features of these new products and to propose the necessary changes in the ADEX’s charter to allow the trading of such products. It is not just the new products themselves, however, which can make the difference, especially when there is competition from several large European derivatives markets that combine impressively high liquidity and volatility with a very attractive pricing policy. The high transaction cost is one of the weakest points of the local derivatives market; it is no secret that many local brokerages have «diverted» their clients to foreign markets, with very satisfactory results. The ADEX plans to follow a more «liberal» pricing policy in 2004, initially focusing on providing incentives. A planned scaled pricing of transactions will lessen the cost for frequent investors. Thus, the more transactions individual, or institutional, investors make, the lower the cost. A continuing high priority is training and familiarizing small investors with the derivatives market and its products. Training will be intensified, given the rate at which new products enter the market. Dozens of seminars, both of a general and more specialized nature, will be conducted. Contracts up 31 percent The ADEX’s total number of contracts increased 31 percent in 2003. However, during the final months of the year, transaction volume in the ADEX failed to keep pace with that of the Athens Stock Exchange (ASE). In 2003, the value of transactions in the ADEX rose 14.40 percent compared to 2002, while the value of transactions in the ASE – excluding prearranged block sales – rose 17.96 percent. A total of 9,683,044 contracts were traded in the ADEX in 2003, up from 7,387,574 in 2002. The average daily number of contract transactions rose from 14,921 in 2002 to 19,559 in 2003. The most-traded contracts were futures on the FTSE/ASE-20 index of blue chips, which rose 34.8 percent. Options on the same index increased 34.99 percent. Beyond these two products, trading is woefully thin, as if investors are afraid to touch the other products. Futures and options contracts on the FTSE/ASE Mid-40, for example, traded only at a rate of a few dozen or, at best, a few hundred, daily. The high transaction costs, small volatility, trading limitations and high requirements, combined with disappointing liquidity levels, keep most investors from dealing in derivatives. By contrast, an increasing number of retail investors are trying their hand at other European derivatives markets. It must admitted, though, that part of the problem is the attack on the derivatives market for allegedly being responsible for the protracted fall in the Athens Stock Exchange. While it is obvious a low-liquidity market lends itself more easily to manipulation, most of the clamor against the ADEX, including calls for its limitation, is mere scapegoating. At least the recovery of the ASE after the first quarter of 2003 rescued the derivatives market from these voluble critics. ADEX managers not only plan to limit the market’s activity but are looking at ways to give it a boost by lowering commissions, for example. The number of ADEX investors is still quite small. At the end of year, there were a total of 21,256 client accounts, 5,774 of which were opened this year. This means that the total number of accounts rose 37.29 percent. However, transaction value was limited to 73 percent of that in the ASE, from 86 percent in 2002. Among ADEX member brokerages, most of the transactions on FTSE/ASE-20 futures were made by Eurobank with 934,824 contracts, a rise of 16.64 percent from 2002. Next were Marfin with 696,213 contracts, up 12.39 percent, National Bank (557,339 contracts, up 9.93 percent) and P&K (533,311 contracts, up 9.49 percent). European markets In most European markets, the value of transactions in derivatives exceeds that in stocks, according to a study by the ASE, based on data from the first eight months of 2003. In August alone, transactions in Germany’s derivatives market (EUREX) were 5.66 times those in the underlying market. In the Warsaw, Milan and London derivatives markets, the disparity was not as great but the ratios were 1.28, 1.07 and 1.01, respectively. The ADEX, with a ratio of derivatives to stock market transactions of 0.53, finds itself in a similar situation as Stockholm’s derivatives market (OM). For the entire eight-month period, trading on index derivatives in Germany exceeded trading on index component stocks 6.46 times.

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