No-one would argue that 2020 has been a transformative year, presenting both opportunities and challenges for traders and asset managers. This has been reflected in soaring derivative trading volumes across the world as stock market volatility triggered increased demand for hedging strategies.
The year 2020 saw markets evolve in two key ways, establishing important trends that are set to continue in 2021. Exchanges across the region are taking note of these when determining their strategy for continued growth and development.
The first is the rise of so-called “Robinhood” traders, named after one of the many zero-commission trading apps that have seen a surge in new sign-ups from retail investors, particularly US millennials who were stuck at home during lockdowns.
However, the booming of this segment is not entirely new to Asia; retail investors have historically been playing a prominent role in markets such as South Korea, India and Taiwan. For example, retail participants comprise about 60% of Taiwan’s stock market, and its accumulated number of accounts increased by 5.7% to 11.2 million as of November 2020, compared with 2019.
Derivatives exchanges are catering to this influx of retail investors in a variety of ways. In the US, a new futures exchange specifically targeting retail customers, The Small Exchange, was launched earlier this year. It aims to make its market accessible to investors at all levels by offering appropriately sized futures for trading – the approach also adopted by many established exchanges with remarkable success, notably Bovespa Mini Index Futures and CME’s E-mini and Micro E-mini contracts.
In Asia, Taiwan Futures Exchange (TAIFEX) is one of the pioneering exchanges in this regard with its Mini-TAIEX Futures (MTX) launched way back in 2001. By closely monitoring this trend, TAIFEX moved forward with recent listings of FTSE 100 Futures, Nasdaq-100 Futures and TIP Taiwan BIO Futures, all in small sizes. In fact, its MTX saw record trading volumes this year, further underscoring how quickly the retail segment is expanding. Products designed in small sizes are in TAIFEX’s pipeline for 2021.
The second evolution taking place in financial markets has been the rise in products catering to ESG (environmental, social and governance) investors, one of the fastest growing investment themes of 2020. Much of this activity has been driven by actions to combat climate change. Asian economies such as Japan and South Korea have both announced ambitious carbon-neutrality targets just a couple of weeks ago. Taiwan is also in the process of refining its carbon emission infrastructure to further reduce its carbon footprint.
Another factor behind the growing popularity of ESG investing in Asia has been commitments made by major public pension funds. Japan’s Government Pension Investment Fund (GPIF) has been instrumental in pioneering a stronger ESG focus in the region, having signed the Principles for Responsible Investment way back in 2015. Taiwan’s Bureau of Labor Funds (BLF), Hong Kong’s Monetary Authority, Malaysia’s Employee Provident Funds and Thailand’s Government Pension Fund have all made announcements supporting the growth of ESG investing.
All of this will encourage more sustainable and climate-focused fund mandates and inflows into ESG instruments in 2021. As pointed out in a recent policy paper by the Futures Industry Association (FIA), regulated derivatives markets globally are already helping the world fight against climate change. With the launch of Asia’s first ESG futures earlier this year, TAIFEX is among those global exchanges that help the world transition to a low-carbon future via the provision of innovative products and trading platforms. Continued innovation to address these concerns will be needed as the global economy recovers in years to come.
The rise of retail and ESG investing will incentivize the introduction of more innovative and varied derivatives services and products that cater to the post-Covid-19 economy. Exchanges will work closely with the investment community to facilitate their changing hedging needs and to support the global economic recovery.
Tzu-Hsin Wu is the chairman of Taiwan Futures Exchange