A Billion Here, a Billion There ... It Adds Up: Both China and India Have Spawned Massive Networks of Retail Futures Brokers Servicing Domestic Speculators, but Neither Country Has Managed to Bring Smaller Commodity Participants into the Hedging Game in a Big Way. the Result Is a Volatile Mix of Peril and Promise, Boom and Bust-In Short, Business as Usual in the Wild, Wild East
Zwick, Steve, Modern Trader
"China and the United States are becoming more and more alike," gushes Mabel Xu, a native of China who is working towards her masters in finance at the Illinois Institute of Technology (IIT).
In the next breath, she describes something she experienced back at home that doesn't sit quite right.
"I know of a lady who earned her money guarding bicycles outside a trading company," she explains. "The market was just developing, and this woman had been watching the numbers ..."
The woman started trading, and made money--at first. "But the numbers she'd been watching were in a range-bound market," says Xu. "Eventually, the market broke out of its range ..."
It gets worse--and more familiar--when Xu describes something she witnessed while participating in an internship. "I could see these people watching news and television, and accepting what they saw as if it were absolute truth," she says. "You had one guy, who was just another customer, sitting in a trading room telling people what to do, but he was cheating them."
Yes, we certainly are becoming more and more alike, and not always for the better. "You hear talk of farmers hedging," says Jiaan Guo, a fellow Chinese who is also working towards his masters in finance at IIT. "That's not going to happen for a while."
The reason: "Lots of them have a relatively low education, and they don't trust people who do have one." He tells of a favorite professor in China who tried to persuade small farmers to use the markets to protect themselves from price swings. "He was completely ignored."
Of course, farmers who double their risk through futures (the so-called "Texas hedge") instead of cutting it in half were almost the norm in U.S. futures markets until a few decades ago. Eventually the U.S. developed risk management models, and maybe China will too.
There's certainly one advantage: regulators who have seen it all before. Su Ning, vice governor of the People's Bank of China, recently said promoting hedging among farmers was essential for developing the rural economy, and several Indian regulators have made similar statements. But that raises the question of who will speculate if the market participants limit themselves to hedging.
"The guys doing commodities are different from the people doing stocks," says Ashwani Gujral, a leading Indian retail analyst and author of the book How to Make Money Trading Derivatives, an Insider's Guide. "The commodity futures traders are mostly professionals who also trade the physical commodity."
But there are a lot of securities speculators just itching to be converted. China has more than 70 million retail securities accounts, compared to just 330,000 institutional securities accounts. Indian retail securities speculators have opened more than 2 million accounts for single stock futures just in the last four years. With numbers like that, it's no surprise ABN AMRO has taken a 49% stake in one of China's largest retail futures brokers.
Nick Ronalds, who is spearheading the venture, says they're not just looking to service Chinese traders who use domestic markets. "Thirty-one companies are now allowed to trade abroad, up from just a handful a few years ago," he says. "As time goes on, they will need a local broker."
By law, all of that outbound business still has to be hedging and must be approved by the China Securities Regulatory Committee (CSRC), but laws in China have a habit of changing at a moment's notice. India's regulatory agency, the Securities and Exchange Board of India (SEBI), is a bit easier to predict, largely because the laws they work within have generally also been hammered out in public.
American and European companies are dipping their toes into India, but they are downright plunging into China's--and with good reason.
"The attitude coming out of Beijing is, 'We may not be open tomorrow, but if you're not in line now, don't expect to be anywhere near the front of the line when we finally open the gates,'" says Andrea Corcoran, director of the Commodity Futures Trading Commission's (CFTC) international division. …