Liquidity in Russian single stock options is expected to return as regulatory reforms and changing economic conditions drive investors away from macro-style investing, according to speakers at a London Stock Exchange (LSE) event in London.
Since the financial crisis in 2007, many investors have shied away from single stock options in favour of investing in derivatives that replicate the performance of an index.
Speakers at the LSE’s Russia and CIS Investor Conference noted that liquidity in the Russian market has shifted towards indices, in line with developments in Europe.
Evgeny Kuteev, managing director of exchange traded derivatives at Otkritie Capital, explained: “There has definitely been a big shift to indices across the asset management industry because they don’t want the risk of a single stock. Their performance is measured against the index so they want to invest in something that’s in-line with that benchmark, just to make sure they aren’t below the benchmark.
However, the panel broadly agreed that growing investor confidence and regulatory change will drive interest back to single stocks.
Nicolas Bertrand, head of equities and derivatives at LSE, said: “In the Italian market we’re starting to see liquidity return to single stock options after many years when investors were focused on the index. They have realised that Italy as a whole was oversold and are now want exposure to specific stocks again and we think this will happen in Russia as well.”
The panel expected Russia to follow suit once regulatory reforms make single stock option investment more viable again.
Issues that have limited single stock option investment in Russia include problems with corporate governance and the payment of dividends, which have helped to drive investors towards investing in indices instead of picking stocks.
“In Russia, it can be difficult to trade single stocks around the dividend period but things are changing,” said Lukasz Sektas, head of CEEMEA equity derivatives flow trading at BNP Paribas. Some businesses are now changing their payment schedules so they will pay much closer to their AGM, whereas in the past you might have to wait six to nine months.”
Doug Welch, director of emerging and western European equity derivatives sales at UniCredit Bank, agrees that Russian businesses are starting to take corporate governance issues seriously, which should improve conditions for trading single stock options.
“Some firms are forming corporate governance committees, which is helping to fill a gap in the corporate governance regulations that exist at the exchange at the moment,” he said. “We hope these kind of initiatives will help to deal with some of the issues faced investing in Russia.”
Sektas said that, while index investing is more liquid at present, Russia still has a relatively active single stock option market.
“Liquidity for single stocks might be down in Russia but it’s still significantly better than most of Europe. In Europe there is a big gap between single stocks and indexes in terms of liquidity but it’s much narrower in Russia,” he adds.
However, the speakers agreed that, even when liquidity in single stocks does pick up, it is likely to be far more volatile than index options.