Cash flow low in derivatives market

Illustrative photo

The total nominal trading value in recent weeks dropped to a record low as compared to the beginning of 2021. However, liquidity in the underlying market showed a positive recovery sign.

Liquidity at a record low

Although the index futures market plays a large role in hedging the underlying stock portfolio, it is also extremely speculative. Due to the possibility of long and short, in both bullish and bearish, and T0, speculators prefer very short trades usually within the session. However, in order to be able to trade profitably, speculators need a very important condition that the fluctuation range is large enough. Speculation means that long and short eats into the difference, so when the swing is too narrow, the risk is huge when you include the transaction fee.

During the period of strong fluctuations in the underlying market in 2022, there were continuous trading sessions with a total nominal value exceeding VND60,000 billion. In the last five sessions, the nominal value was just over VND14,000 billion per day. This is the lowest transaction level since the beginning of 2021, even equivalent to the end of 2018 when investors were not familiar with derivatives trading and the number of accounts was also very low. At the end of December 2020, only 173,395 derivative trading accounts were opened.

The current difference is that the number of derivative trading accounts is still increasing monthly, such as in March when there were 25,353 new accounts, in April there were 18,921 new accounts, and by the end of April the total number of accounts had reached more than 1,263 million. However, the daily liquidity dropped seriously, which means that many speculators leaving this market would return to the base market, or because of unfavorable trading conditions they may reduce their activities.

Indeed, with a nominal value of around VND14,000 billion, the actual amount of money used for daily deposits is very low. Currently, the margin rate for each VN30-Index futures contract is 17 percent since 15 December 2022, which means that out of a total nominal value of about VND14,000 billion per day, the maximum amount to place a deposit is only VND2,300 billion with many securities companies requiring a higher margin. In addition, due to T0 transactions, it means that investors can open and close positions continuously. Assuming the average frequency is that each investor opens and closes 3 times a day, the amount of money needed to deposit is less than VND800 billion per day. Compared to the average transaction size of about VND15,000 billion in the underlying market in recent days, the amount of money in the derivatives market is very small.

Derivatives margin

The total value of money in derivatives margin accounts for an unknown number. It is possible that this amount of money is much larger than the calculations made, but the important thing is that the intensity of this money movement is low, which shows the level of daily liquidity. There is a lot of speculation about this cooling off, from losing money over time to rolling capital back into the underlying market. However, one of the more credible reasons is that the market is not yet suitable for trading.

Fluctuations and trends are paramount in the derivatives market. In an obvious uptrend or downtrend of the underlying market or the VN30-Index, an investor can hold an open position overnight. For intraday speculators, strong swings can make a spread large enough to warrant a profit after considering risk costs such as stop-loss margins and trading fees. Statistics with the VN30 index since March 2023 up to now in both factors mentioned above are not clear. The main trend of this index is sideways, and the fluctuation range measured by the 5-day ATR index is similar to the period of the third quarter of 2020 when the average nominal trading value was also around VND13,000 billion per day.

The market context is not favorable, so it is not surprising that the trading intensity of investors in the derivatives market gradually decreases. In the second half of March, the total nominal value reached about VND33,100 billion per session when VN30-Index had a short rally due to the effect of reducing operating interest rates for the first time. Then it dropped to an average of VND16,600 billion per session in the whole month of May and in the last five sessions alone it was just over VND14,000 billion.

While the derivatives market was sluggish due to its dependence entirely on the movement of the VN30 Index, the basis of which is the trading of blue-chip stocks, small speculative stocks in the underlying market were very active and had strong price increases. This also attracts the attention of speculators, as the speculative nature of the derivatives market is also very high. Statistics with fluctuations of the VNSmallcap Index representing small-cap codes on HoSE in May 2023 increased by 9.35 percent while VN30-Index increased by 1.42 percent. Concerning the performance of specific speculative stocks, the Smallcap group had more than 30 growth stocks exceeding 20 percent in April and May 2023.

For most speculators, the stock market is a more familiar platform when it comes to making mistakes, but by holding stocks in the future there is still a chance to recover.