The Taiwan Futures Exchange (TAIFEX) yesterday said that heavy losses sustained by investors during a bout of volatility last week were the result of a lack of sound risk management and not caused by flaws in its trading mechanism.
Reacting to a steep overnight drop in the Dow Jones Industrial Average, the TAIEX tumbled 4.95 percent, or 542.25 points, to close at 10,404 on Wednesday last week.
During the session, a number of TAIEX options investors caught in the stampede following the market rout were left with especially heavy losses, which they said could have been avoided.
Bearish investors who had sold call options said that prices of their positions had climbed higher, bucking the TAIEX’s decline.
Affected investors also said that negligent market makers had prevented them from settling their positions to minimize losses.
They also questioned the TAIFEX’s decision to exclude the options market from its price stabilization measures.
The TAIEX said that abnormal options price movements during the session were caused by a spike in volatility and were fanned by futures brokerages that had proceeded to force the settlement of positions held by customers in a bid to prevent further losses as their portfolio value tanked.
Most of the affected investors had options positions that were deeply out of the money or had a further-out expiry date, the TAIFEX said, adding that market makers are only obligated to provide more immediate options contracts.
The exchange said that its price stabilization mechanism is designed to guard against market disruptions from sudden occurrences, such as “fat finger” errors, and that it does not regulate continued price actions.
Price stabilization measures implemented by futures authorities in Hong Kong also do not include the options market, it added.
The Chinese National Futures Association (CNFA, 期貨公會) said that when brokerages force settlement of customers’ positions, the action is aimed at containing risk and is carried out automatically once the required conditions are met.
In this case, futures brokerages are not required to anticipate market movements and find the most favorable trades for their customers, the association said, reminding investors that the options market is a zero-sum game.
Investors had complained that positions were settled at the worst possible price points, during the stampede, while others said that brokerages had ignored that they had combination positions — a trading strategy that involves the purchase and sale of call and put options on the same underlying asset.
The TAIFEX estimated that investors had failed to settle a total of NT$120 million (US$4.1 million) from the session alone.
Futures brokerages said that they had taken collateral and arranged repayment plans with most of the affected investors.
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