Future of futures trading is in Asia, says Phillip Futures CEO

The strong growth in the global futures and options volume came largely from Asia-Pacific, the world’s largest futures and options market. The region, which accounted for about 41% of global volume, leapt 31.7% y-o-y to 6.76 billion in the six-month period ended June 30, from 5.13 billion. Open interest grew 4.7% y-o-y to 79.2 million in June, from 75.6 million.

In contrast, North America — now the second-largest futures market — fell 5.3% y-o-y to 5.1 billion in the six-month period ended June 30, from 5.4 billion. Open interest rose 2.1% y-o-y, however, to 457 million in June, from 447.6 million. The most popular category of futures is equity index (35.4%), followed by individual equities (18.3%) and interest rates (14.5%).

Teyu says one reason for the surge in futures volume in Asia is the rise of China in the early 2000s. As the country’s growth surged, the demand for commodities, especially those related to infrastructure, grew in tandem. This required more hedging to protect against downside risks.

Another reason is that stock exchanges in Asia have diversified into other asset classes over the past decade, says Teyu. Although equities continue to be their “bread and butter” business, stock exchanges are finding other avenues for growth, he says. “Regionally, more and more exchanges are starting to focus on futures — from single- stock futures to stock-index futures,” he tells The Edge Singapore. “The more global you become, you want a vibrant capital market to attract investors.”

Also, better financial literacy has contributed to higher futures volumes, says Teyu. He points out that this could be due to better education levels overall, as well as growth in the middle class. New formats, such as webinars, are also helping people learn new financial skills, he adds. Investors no longer have to travel to a seminar hall, but can watch it from a computer in the comfort of their home. If they cannot watch it live, they have the option of watching it later, he says.

“People’s interest is there. They are not risk-averse, but are loss-averse. They don’t want to lose money. There is an appetite for people to learn new skills,” he says. “When people learn new things, they want to try new things. Normally, they will try it out in their domestic market before going international.” Teyu says the growth in the futures industry will continue to be driven by Asia, especially China and perhaps India. These are countries with huge populations, a growing middle class and increasingly sophisticated and vibrant financial markets. “For that kind of growth, you need these factors,” he says.

Riding the futures wave

Teyu says Phillip Futures has been “lucky” to benefit from the industry growth in futures trading over the past decade. He notes that this was due to the hard work put in by everyone at the company. “We have been quite fortunate over the last 10 years, as we managed to tap the rise of China,” he says. “We rode the wave.” Nevertheless, Teyu concedes that the futures industry is challenging because of its global nature. In particular, he says, the company faces intense pricing competition from international brokerages backed by big international banks such as JPMorgan Chase & Co, Bank of America Corp and Société Générale.

Teyu notes that Phillip Futures’ total trading volume was “slower” in 3Q2019 compared with the same quarter last year. This came on lower volatility and increased competition. He declines to give a breakdown of each futures product category. Nevertheless, earnings growth is on track to matching last year’s record earnings. “With another quarter to go, we hope there will be a meaningful breakthrough and to close 2019 strong,” he says. Phillip Futures’ forex business — including gold and silver bullion — has also done well. The company typically sees volume of US$80 billion to US$100 billion each year. “I wouldn’t say we have reached new highs. But if it were based on last year, it would be one of the highest over the last 10 years,” says Teyu.

According to Teyu, 80% to 85% of Phillip Futures’ clients are institutions. They include other futures brokerages, financial institutions, professional traders and physical hedgers, such as plantation owners who want to hedge their physical goods. The remainder 15% to 20% are retail clients.

This year, the company is planning to open an office in Sabah. This will expand its network of offices in 17 regions and countries across Asia-Pacific, Europe and North America. The company holds 27 clearing memberships in exchanges worldwide, including Dubai, Hong Kong, India, Indonesia, Japan, Malaysia, Singapore, Thailand and the US.

Risk management

Now, as the global economy is slowing, could there be an increase in demand for futures products? After all, futures trading is all about risk management, says Teyu.

As he recalls, the impact resulting from the Asian financial crisis in 1998 was devastating. The Straits Times Index plunged about 800 points, recounts Teyu, who was then in his early 20s. Across the Causeway, the Kuala Lumpur Composite Index was worse off, plummeting about 1,100 points. “A lot of people lost money, especially the old aunties,” he recalls vividly. This was on top of many job losses and shuttered businesses.

While many economies have emerged stronger today, dark clouds are appearing on the horizon. In particular, forward indicators are already showing signs of economic weakness, which has led market observers to predict a downturn that could result in a global recession.

Compounding the situation, global debt — including corporate and household — is at a historical high. Some market observers are now worried that the obscene amount of investments going into new economytype companies — many of which are loss-making and highly leveraged — could spark off the next financial crisis.

“When it comes to financial crises, it is only one way [for equity indices to respond]: down. The question is: by how much? For commodities like base metals, that depends on [economic forces] such as demand and supply,” says Teyu, noting that gold is an exception. In addition, foreign exchange (forex) trading could see heightened demand for safe-haven currencies such as the US dollar and Japanese yen, he adds, while the Indonesia rupiah and Indian rupee could come under pressure.

Teyu says the volume of futures trading will depend on the volatility of the underlying market. If prices of assets move significantly and swiftly, traders may enter the market to hedge against risk or speculate, therefore increasing the volume of futures trading, he explains. “The lowest volume is when things are too stable. When there is no volatility, hedging [activity] will decrease tremendously,” he says.

Volatility could also come from other sources. According to Teyu, US President Donald Trump’s controversial and unpredictable nature has the ability to influence financial markets. Just a few weeks ago, the Trump administration was considering delisting Chinese companies from the US stock exchanges, causing an upheaval in the financial markets. Subsequently, however, Trump’s chief economic adviser clarified that the move to delist Chinese companies traded on the US stock exchanges was “not on the table”. Thus, market participants need to be alert and manage their risks accordingly, says Teyu.

Unexpected career

Looking back, Teyu says he would not have believed it if someone had told him that he would end up embarking on a career in the futures industry. His dream was to become an equity analyst or dealer. In fact, Teyu started as a management trainee at Phillip Securities, the stock brokerage arm of PhillipCapital Group in 1998. “When I was in equities, I never liked futures,” he says.

But all that changed when he joined Phillip Futures in 2002. Teyu was given the opportunity to try something new under a respected mentor. He took a leap of faith. “Sometimes, in life, it is not about shutting all the doors. If you are given an opportunity, just be open to exploring it.”