OFF INTO THE WILD WET YONDER How does this...
In the United States, only an underwhelming 13.8% of the population owns individual stocks. In contrast, while there is limited data on how many Chinese own individual stocks, approximately 90% of the daily turnover on China’s stock markets is from retail investors. To perhaps put that into better perspective, 81% (and growing) of Chinese retail investors trade at least once a month, compared to 53% of Americans.
The theories behind why Americans don’t seem to care that much about stocks are aplenty, ranging from having very little extra cash to risk on stocks to the fear that markets are equipped to benefit the wealthy. The reason varies for each individual, but the end result is the same, with U.S. markets left to the “professionals” while average Americans stay away in droves.
The average Chinese seems cut from a different cloth, and there is currently no better casino in town than the Chinese stock markets. No matter if you’re a housewife, noodle shop owner, or plastic surgeon, if you’re in China then you are probably throwing money at the stock market.
How long this will go on is unknown, but if it’s not a major crash that ruins the party soon then it will most certainly be high-frequency traders who come in, take control, and run roughshod over the ill-informed and less savvy.
It makes no difference what you choose to call them—machine, bot, high frequency, algorithmic, or program traders—they are coming to China in a hurry. Ironically, mom-n-pop traders will be able to thank their returning sons from U.S. colleges for this rise of the machines.
The rise of high-frequency trading subsequently follows the rise of the derivative markets in China. Derivative markets hardly existed a few years ago, but it appears China is following the lead of the United States and is diving head first into this hyper-aggressive world of complicated paper assets and the microsecond trading that it attracts.
Many wonder what will happen when this technology finally catches up to the Unites States. Will it send the already hyperbolic markets in China higher, or will it correct and squeeze out all the already very crowded trades?
Derivative markets have a way of changing the complexity of normally less interesting markets. Not to say China’s markets are uninteresting—especially with the Shenzhen Stock Exchange Composite Index (SZCOMP) already up over 100% on the year—but when you add huge amounts of capital flow from hedge funds and institutions, high-speed trading, sophisticated hedging tools, and even more ways to short the markets, things do inevitably change and the market starts to create insiders (investment pros) and outsiders (retail investors).
The gap between the wealthy and the not so in China is already growing, and by turning the financial markets into exclusive derivatives casinos will most certainly make matters worse. Not that your average Chinese can somehow supplement themselves with any guarantees from the stock markets. No, it is more likely a situation that when the markets become exclusive only the exclusive will benefit.
The world has yet to see the Chinese version of investment banker Jamie Dimon or hedge fund guru Ken Griffin, but one can imagine we will in a very short time. And then all the mom-n-pop traders will be back to their local mahjong circles cursing the “rigged” markets.