Exclusive: Huatai enters HK listed structured product market

The Chinese securities house will debut its suite of derivative warrants (DWs) in Hong Kong SAR tomorrow (6 June) following a two-year process.

The Chinese securities house has been working on the launch since early 2021.

The number 'six' has a special connotation of good fortune in Cantonese. The journey of successful trading and investing requires skills, but a bit of good luck will always helpsPaddy Cao, Huatai International

“Although Huatai has a leading presence in both listed and over-the-counter [OTC] products in China, its presence in Hong Kong SAR has so far been concentrated in the OTC market,” Cao said. “The warrants business is part of [Huatai's] broader push to enter and grow in the listed products domain in the city.” product segment as part of its restructuring in Asia.

The six DWs issued by Huatai are linked to five Hong Kong-listed stocks and the Hang Seng Index (HSI), which accounted for over 70% of the DW market in terms of outstanding volume.

“The number ‘six’ has a special connotation of good fortune in Cantonese. The journey of successful trading and investing requires skills, but a bit of good luck will always help,” said Cao.

The new Huatai DWs which comprise four calls and two puts will go live on Hong Kong Exchanges and Clearings (HKEX) on 6 June with Huatai Financial Holdings (Hong Kong), a fully-owned subsidiary of Huatai Securities which is the third-largest Chinese securities house by assets, acting as the issuer and liquidity provider.

“We are excited to enter the structured products market as an issuer, after receiving formal approval on 5 May [from HKEX],” Paddy Cao (pictured), head of warrants at Huatai International, told SRP.

According to Cao, the traded notional of structured products traded by Huatai’s equity derivatives division totalled more than US$700m across onshore and offshore in 2022.

With the new listing Huatai becomes the 17th issuer in Hong Kong's DW market after the most recent entrant - DBS Bank, and the fourth issuer from China after Bank of China, Haitong Securities and Guotai Junan Securities.

Last November, Vontobel announced that it would exit the listed structured

“Hong Kong structured products have always been heavily dominated by retail investors. Globally, we have seen a massive surge in retail trading, epitomised by the Game Stop saga in early 2021,” he said.

During Covid-19 when working remotely became a norm, the retail group showed growing desire to stay involved in financial markets, which led to rising demand for a wide variety of financial products and education.

“Meanwhile, we have seen the barriers to entry lowered, as more brokerages now offer lower fees and costs of trading out of commercial consideration,”

Cao added. “As a result, investors are increasingly looking for cheaper ways to trade, products with leverage and liquidity to trade into and get out of positions quickly.”

As investor choice increases, DW issuers have branched out from headline blue-chip names in search of fresh opportunities. This is “quite beneficial” for investors as they will be more prepared when certain small stocks became a hit due to breaking news, said Cao.

While Huatai aims to expand its DW underliers to include the majority of the eligible list within one year, it also plans to roll out callable bull bear contracts (CBBCs), which are an integral part of the structured products market, according to Cao.

Scalable approach

Cao noted that a differentiator will be its no-legacy approach to the market.

“One of the benefits of being a new player is the ability to innovate and start from scratch,” he said. “We do not have the constraints of having to fit within an established ecosystem of trading systems or trading strategies.”

He and his team spent most of their time prior to the regulatory approval developing the required trading tools, strategies and systems - some are provided by external parties - and implementing risk controls and capabilities.

The former Optiver trader now manages a team of five comprising sales, trading and technology with their backgrounds spanning structured products issuance, high-frequency trading, media and system development.

“Substantial investments have been made in the system setup, recruitment and formation of the core and supporting team, and staff training,” said Cao.

Investor education will be built up once the business is operational, subject to feedback from investors.

“One behaviour we have noticed is that turnover is a key consideration among Hong Kong structured product investors,” said Cao.

"Whilst significant and highly visible, there are a range of other factors such as spread, price and outstanding proportion that should be given equal, if not more weight before making a trade.”

Accordingly, the Chinese issuer plans to provide “fair and transparent prices” through more automation tools to systematically manage its trading and pricing.

“This will reduce the risk of errors through manual control whilst ensuring consistency in the way we price across products and responsiveness to changing market conditions,” he said.

On HKEX, structured products recorded average daily turnover (ADT) of HK$11.7 billion in May, representing a stable level from April and accounting for 11.5% to cash market, the latest monthly report by the exchange shows.

As of 31 May, the number of listed structured products decreased 1.8% to 10,365 while the market value of structured products held by investors was down 11.9% to HK$3 billion compared with a month ago.

HSI alone took up 62.3% of the market share of the combined market turnover, with the top five local stocks - Tencent, Meituan, Alibaba, HKEX and Ping Ancontributing another 25.9%.