Financial derivatives trades surge amid growing concern

Regulators scramble to draw up measures to control high-risk trades


Korea’s financial derivates market is expected to surpass 30 quadrillion won ($26.6 trillion) this year, data showed on Tuesday, amid growing concerns about huge losses inflicted on retail investors.

The strong appetite for high-risk trades of futures, options and equity-linked warrants is now set to boost the total trading volume of derivates to reach 30.35 quadrillion won by the end of the year, according to the Financial Supervisory Service and the Korea Exchange.

The country’s regulators are scrambling to put a limit on the spiraling losses individual investors on the local bourse have to bear by investing in the risky financial investment tools, but the upward trend, as evidenced by the latest projection, shows no sign of let-up.

Last year, the total volume stood at 28.54 quadrillion won, with 3.75 billion contracts processed on the Korea Exchange. The volume made Korea the world’s biggest derivatives arena, raising questions about whether regulations should be toughened.

In the January-October period this year, the trading volume of derivatives on the domestic bourse came in at 14.27 quadrillion won. Over-the-counter market volume was tallied at 6.61 trillion won in the first six months of this year, according to the FSS and Korea Exchange data.

In a five-year period from 2006 through 2010, the trading of financial derivates on the Korean bourse staged a double-digit growth each year. The annualized average was 27 percent and the rate for this year is also expected to hover at about 20 percent.

Regulators and analysts said the surging demand for derivatives trades is fueled here by “scalpers” ― investors who process a number of trades in real time throughout the day to gain a profit from extremely short-term momentum-based bets.

“When the key index moves up, the prices of stocks go up accordingly, which is usually followed by a decrease of futures and options, but the reality is that more scalpers are bolstering the derivatives trading volume,” said an official from the FSS.

The FSS said on Sunday it would come up with a set of measures aimed at overhauling the market for derivatives, which have been criticized because of their speculative nature and irregularities related to them.

Many retail investors are suffering in the foreign exchange margin trading in the financial derivatives market. The losses of individual investors in that particular field reached 76.5 billion won in 2009, 58.9 billion won in 2010 and 33 billion won in the first half of this year.

By Yang Sung-jin (insight@heraldcorp.com)