Trading the Kospi
- Thread starter rockbrain
- Start date
01-21-04 Steve_IB> I'm not sure if you'd be eligible to get the standing proxy and trade through a Korean brokerage (?)
Not that I'm challenging your statement, but I'd be interested to learn additional details about any constraints preventing me from doing this. If the constraint is needing to show up in person, flights to Seoul start at around $700 R/T, even if that is within artillery range of North Korea. ;-)
01-21-04 Steve_IB> The whole issue of switching the KOSPI from KSE to KOFEX has become very political, so I'm not sure how long the wrangling is going to take.
I would prefer to not have to setup a special overseas account just to trade this one instrument. However, this instrument eventually coming to US-domiciled brokerages is more a question of when not whether. If setting up an overseas account gives me a head start on the learning curve for something with which I plan to spend more time once it comes onshore, then I'm willing to incur the cost.
Everybody emphasizes the volume and liquidity of Kospi futures (& options). However, equally important benefits are the reduced leverage & margin while the liquidity still encourages tight spreads. Additionally, the volatility exposure may be a better middle-ground between US equity index futures and equities.
KFE hasn't yet updated the English side of their web site to reflect the new status of the KOSPI. Searching elsewhere shows margin of 15% initial & 10% maintenance. The KRW/USD FX rates are around 1200. The contract size is 500,000 KRW ($416 USD) per point. The minimum tick is 25,000 KRW ($21 USD). The futures price is around 113 points. That gives a contract notional value of 56.5 Million KRW ($47K USD). Therefore, the margins in USD are $7050 initial and $4700 maintenance. Superficially, that might seem like more capital at risk than the e-Mini SP500, but it is considerably less leverage.
More significantly, across all of 2003, the intraday High minus Low difference had a maximum of 3.59 points ($1500 USD), and an average of 1.65 points ($686 USD). Taking the Standard Deviation of O,H,L&C as a proxy for calculating volatility shows a max of 2 points ($832 USD) and an average of 0.8 points($333 USD). Worried about inter-day gaps if you get stuck overnight? Worst case was 4.35 points ($1800 USD), but the average was 1.1 points ($463 USD).
In summary, there's enough volatility to be worth trading, but modest enough to avoid Hari Kari. This should make it easier to deliver smoother equity curves. This is a superior instrument to trade, particularly for smaller traders.
As a nice little bonus, the KRW has strengthened against the USD over the past 2 years. (Hyundai keeps shipping more cars to the USA ;-)
-------------------------------------------------------------
P.S. Some recent related info includes the following:
FUTURES Magazine, Dec. 2003 issue
Top 50 Brokers (futures)
(as measured by segregated customer funds)
excerpting just that portion of the list flagged for KSE (Korean Stock Exchange)
data as of Sept. 2003
1.Goldman Sachs
4.Merrill Lynch
7.Fimat
11.Barclays
14.ABN_Amro
15.CSFB
16.DeutscheBank
19.BNP_Paribas
Not that I'm challenging your statement, but I'd be interested to learn additional details about any constraints preventing me from doing this. If the constraint is needing to show up in person, flights to Seoul start at around $700 R/T, even if that is within artillery range of North Korea. ;-)
01-21-04 Steve_IB> The whole issue of switching the KOSPI from KSE to KOFEX has become very political, so I'm not sure how long the wrangling is going to take.
I would prefer to not have to setup a special overseas account just to trade this one instrument. However, this instrument eventually coming to US-domiciled brokerages is more a question of when not whether. If setting up an overseas account gives me a head start on the learning curve for something with which I plan to spend more time once it comes onshore, then I'm willing to incur the cost.
Everybody emphasizes the volume and liquidity of Kospi futures (& options). However, equally important benefits are the reduced leverage & margin while the liquidity still encourages tight spreads. Additionally, the volatility exposure may be a better middle-ground between US equity index futures and equities.
KFE hasn't yet updated the English side of their web site to reflect the new status of the KOSPI. Searching elsewhere shows margin of 15% initial & 10% maintenance. The KRW/USD FX rates are around 1200. The contract size is 500,000 KRW ($416 USD) per point. The minimum tick is 25,000 KRW ($21 USD). The futures price is around 113 points. That gives a contract notional value of 56.5 Million KRW ($47K USD). Therefore, the margins in USD are $7050 initial and $4700 maintenance. Superficially, that might seem like more capital at risk than the e-Mini SP500, but it is considerably less leverage.
More significantly, across all of 2003, the intraday High minus Low difference had a maximum of 3.59 points ($1500 USD), and an average of 1.65 points ($686 USD). Taking the Standard Deviation of O,H,L&C as a proxy for calculating volatility shows a max of 2 points ($832 USD) and an average of 0.8 points($333 USD). Worried about inter-day gaps if you get stuck overnight? Worst case was 4.35 points ($1800 USD), but the average was 1.1 points ($463 USD).
In summary, there's enough volatility to be worth trading, but modest enough to avoid Hari Kari. This should make it easier to deliver smoother equity curves. This is a superior instrument to trade, particularly for smaller traders.
As a nice little bonus, the KRW has strengthened against the USD over the past 2 years. (Hyundai keeps shipping more cars to the USA ;-)
-------------------------------------------------------------
P.S. Some recent related info includes the following:
FUTURES Magazine, Dec. 2003 issue
Top 50 Brokers (futures)
(as measured by segregated customer funds)
excerpting just that portion of the list flagged for KSE (Korean Stock Exchange)
data as of Sept. 2003
1.Goldman Sachs
4.Merrill Lynch
7.Fimat
11.Barclays
14.ABN_Amro
15.CSFB
16.DeutscheBank
19.BNP_Paribas
One common aspect of processing a "standing proxy" as a foreign investor in Korea is what's known as an "IRC" [Investment Registration Card].
http://www.ksd.or.kr/Eng/Service/Se030601.jsp
I tried to dig around to find out if there were any constraints on filing an IRC. For firms (LLC's, Inc's, etc) it looks like the key requirement may be 3 years of financials audited by a CPA. For individuals it looks like there might possibly be a residency requirement of 6 months, but I think I may be making assumptions here.
HOWEVER, the KOFEX seems to state that an IRC is NOT required if you only want to trade KOFEX:
http://www.kofex.com/english/invest/invest_pro.asp?sm=1_0
"KOFEX does not require an Investment Registration Card (IRC) for foreign investors as the Korea Stock Exchange does. Foreign investors may use the IRC to open accounts at foreign exchange banks and futures companies if they have one."
For what it's worth, E*Trade seems to have worked around the CFTC restrictions against Korean trading by creating a joint venture in which they are just one shareholder (with Softbank as largest shareholder?). Regardless, the name "E*Trade Korea" is given to the joint venture. E*Trade Korea does accept foreign investors as per the standard procedures.
http://www.etrade.co.kr/en/enae/aec_en_investpro1.html
http://www.etrade.co.kr/en/enae/aec_en_etkintro.html
Technically, this is not the exact same thing as E*Trade letting US domestic account holders trade Korean markets. The Korean foreign account will be totally separate from the US domestic account. E*Trade is also not yet allowed to market this service in the U.S. However, these distinctions don't prevent E*Trade from getting their name out there early to build brand recognition and gain experience for the time when they are allowed to offer KSE/KOFEX to US domestic account holders.
There might be some benefit for innovative brokerages to learn from this lesson, particularly those which aren't afraid to challenge the status quo... ;-)
http://www.ksd.or.kr/Eng/Service/Se030601.jsp
I tried to dig around to find out if there were any constraints on filing an IRC. For firms (LLC's, Inc's, etc) it looks like the key requirement may be 3 years of financials audited by a CPA. For individuals it looks like there might possibly be a residency requirement of 6 months, but I think I may be making assumptions here.
HOWEVER, the KOFEX seems to state that an IRC is NOT required if you only want to trade KOFEX:
http://www.kofex.com/english/invest/invest_pro.asp?sm=1_0
"KOFEX does not require an Investment Registration Card (IRC) for foreign investors as the Korea Stock Exchange does. Foreign investors may use the IRC to open accounts at foreign exchange banks and futures companies if they have one."
For what it's worth, E*Trade seems to have worked around the CFTC restrictions against Korean trading by creating a joint venture in which they are just one shareholder (with Softbank as largest shareholder?). Regardless, the name "E*Trade Korea" is given to the joint venture. E*Trade Korea does accept foreign investors as per the standard procedures.
http://www.etrade.co.kr/en/enae/aec_en_investpro1.html
http://www.etrade.co.kr/en/enae/aec_en_etkintro.html
Technically, this is not the exact same thing as E*Trade letting US domestic account holders trade Korean markets. The Korean foreign account will be totally separate from the US domestic account. E*Trade is also not yet allowed to market this service in the U.S. However, these distinctions don't prevent E*Trade from getting their name out there early to build brand recognition and gain experience for the time when they are allowed to offer KSE/KOFEX to US domestic account holders.
There might be some benefit for innovative brokerages to learn from this lesson, particularly those which aren't afraid to challenge the status quo... ;-)
What commission rate does anyone here pay for Kospi? I just started trading her but my commission rate is usury & I need to find better.
Def, Steve, is this coming along? Any thoughts on what commissions will be?
Def, Steve, is this coming along? Any thoughts on what commissions will be?
For Bluehorseshoe (and whoever) re: commissions --- Kospi futures commissions are typically .01% (one basis point) of the contract value, at the execution price, (per side), negotiable of course for large size. Kospi futures options are anywhere from .40 down to .15, (i.e. 40 basis points down to 15 basis points), for size. I have contacts if you need to connect or shop commissions.
I attended a presentation by the Korean Futures Exchange (KOFEX) today in Singapore. They said they applied to the CFTC two weeks ago for that 'letter' that would allow US residents to trade the Kospi products. While timing of approval depends on the CFTC they said this can usually take ~6 months.
On a related note it smells like the Singapore Derivatives exchange is about to launch a major initiative to transition to electronic trading. Going to put some terminals on the exchange floor and try getting the locals off their feet. Currently the exchange is preparing to roll out a new trading engine later this year. What I heard was that the current contracts will be migrated to the screens and SGX is in talks w/ NYMEX (?) to launch a new JV floor-based exchange to trade energies.
Its aaaaaaall good ... in theory anyway.
On a related note it smells like the Singapore Derivatives exchange is about to launch a major initiative to transition to electronic trading. Going to put some terminals on the exchange floor and try getting the locals off their feet. Currently the exchange is preparing to roll out a new trading engine later this year. What I heard was that the current contracts will be migrated to the screens and SGX is in talks w/ NYMEX (?) to launch a new JV floor-based exchange to trade energies.
Its aaaaaaall good ... in theory anyway.
May/June 2004 issue of Futures Industry Magazine
"A New Day for Kofex"
http://www.futuresindustry.org/fimagazi-1929.asp?a=920
The stats show that foreign participation in these contracts is growing, while Korean domestic retail participation is cooling.
"A New Day for Kofex"
http://www.futuresindustry.org/fimagazi-1929.asp?a=920
The stats show that foreign participation in these contracts is growing, while Korean domestic retail participation is cooling.