The explosion in derivatives products available to the institutional market could ultimately undermine stock exchanges across the world.
The explosion in derivatives products available to the institutional market could ultimately undermine stock exchanges across the world, according to Putnam Investments head of investments Kevin Cronin.
Cronin said if the equity derivatives market developed in the same way as the bond market, it would push the weight of money away from direct equity investing.
"If you see even a fraction of this development on the equity derivatives side, it will gradually change the approach investors have to the equity market. It will certainly decrease the relevance of the various exchanges," Cronin told an investment briefing in Sydney yesterday.
In 2007, an estimated $50 billion worth of credit default swaps traded, up from around $2 billion in 2003.
Cronin said equity exchanges would become the playground of the individual investor, in much the same way New York Stock Exchange corporate bond offerings had.
'They [money managers] are all looking at their equity businesses and realising they are not making money in cash equities, they are making money in equity derivatives," he said.
Market liquidity has shifted from the traditional cash bond market to the derivative market and the size of trades has increased dramatically.
Cronin said decreasing the high-yield exposure in its multi-sector bond fund in 2004 by $500 million would have taken around three days.
"Now, with credit derivative products, we can sell that $500 million exposure in about 30 seconds," he said.
In June 2007, there were 5.7 million cash market trades with a value of $143.9 billion on the Australian Securities Exchange. On a full financial year basis there were 48.9 million cash market trades with a value of $1.3 trillion. This was a record level of trading, both in volume and value.
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