Taking on the global behemoths is not easy in any market. The task becomes even more gruelling when it is the competitive Hong Kong structured products market. Haitong International met the challenge and came up trumps by boosting its warrants portfolio and offering the largest coverage of underlying assets.
The numbers speak for themselves. In just two years since it entered the Hong Kong equity derivatives market, Haitong International’s products now cover 185 underlying assets, the most in the city. It launched a total of 1,503 warrants and callable bull or bear contracts (CBBCs) in the 12 months to March 2018, according to Duke Du, head of equities derivatives and wealth management at the firm.
CBBCs are instruments that track the performance of an underlying asset, so their trading price tends to mirror the movement in the price of the asset. Like warrants, CBBCs can be issued over a range of eligible underlying assets prescribed by the Hong Kong Stock Exchange from time to time.
The firm also plans to offer warrants linked to Chinese corporations listed in the US, or so-called unicorns considering a listing, to allow investors to trade the securities during Asian hours and tap into their preference to use Hong Kong as a structured products base to access Chinese securities.
The new products epitomise Haitong International’s progress in the Hong Kong equity derivatives market after its entrance in 2016. Over the past two years, it has moved on to handle not just the most underlyings, but also offers one of the most tight bid-offer spreads in the market, thanks to its big data analytics. “We hope we can build the bridge over the Pacific ocean, as it is highly unlikely there will be a fully bilateral connectivity immediately between China and US amid the trade tension,” Du says. “That will create a big demand in Hong Kong for all available financial products to provide connectivity between the two biggest economies in the world.”
The advent of Stock Connect – a collaboration between the Hong Kong, Shanghai and Shenzhen stock exchanges, which allows international and mainland Chinese investors to trade securities in each others’ markets through the trading and clearing facilities of their home exchange – and the upcoming ETF Connect linked to indexes such as CSI 300 and HSCI, can also boost volumes, Du says.
“Investors do not have access to derivatives in China or through Stock Connect. So the only way investors can play with this huge money flow is through structured products,” he says. “I think the depth and scale of the Hong Kong market will continue to grow. Even today, the equity derivatives market in China is still underdeveloped. They only have listed options linked to one single index, there is no single-stock option, so all these restrictions to the free market create a natural advantage for Hong Kong.”
Haitong International now has approval from Hong Kong Exchanges and Clearing to issue warrants referencing Alibaba, which is part of its efforts to offer products linked to Chinese new economy firms or to Chinese depository receipts (CDRs) such as Didi Chuxing and Xiaomi. Given CDRs can’t yet be freely converted, warrants or CBBCs linked to these names will be alternative access products with more flexibility, he said.
The new products mark the evolution of Haitong International’s derivatives business, which began with two products in 2016, as it spotted a gap in the market when some banks withdrew. It then rapidly expanded, launching 642 products brtween April 2016 and March 2017 and more than doubling that over the next year. Product turnover surged threefold in the year to March 2018, and the vega outstanding has climbed to almost a tenth of the market.
The broad range of underlying assets is one of the firm’s unique attributes as an issuer that makes it competitive. Some of the non-mainstream underlying assets it offers received strong demand, says Kenny Chong, executive director for derivatives trading. The underlyings include Sihuan Pharmaceutical warrants, which had 100% open interest in the market, FDG Electric Vehicles and Global Brands Group Holdings, which reached above 50% open interest of total issue size. Other underlying stocks, such as Greentown China Holdings, Kaisa Group Holdings and Guangshen Railway Company, also saw a significant open interest in the market.
“Our expertise in stocks selection has enabled us to tap into corners of the market where no issuers have ventured and brought new horizons to the market,” he says.
Haitong International analyses every transaction of the cash market in the Hong Kong stock exchange every day, from trade volume to tick data. Using that data, it determines the market sentiment to provide the right product mix and assets for clients to invest in. It also pores over products provided by other issuers. Its financial engineers comb through coding to understand issuers’ quality by focusing on how many times an instrument will provide bid-offer within one spread, two spread, three spread, and so on, together with the open interest analysis and quote volume.
This allows it to provide better pricing, turnover, product availability and average bid-ask spread, Chong says.
Haitong International is also starting to tap its wealth management franchise to recycle the risk inventory.
In the aftermath of the global financial crisis, US and European banks shrunk from the Hong Kong financial marketplace. Chinese institutions saw the opportunity and jumped in to dominate multiple product lines, from capital-raising to structured and wealth management products. Haitong International is now probably one of the top runners in the market, Du says.