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European Retail Investors using increasingly popular Euro Derivatives to Hedge FX Exposure

by uma
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  • Euro-linked currency derivatives becoming more popular among European retail investors
  • Proportion of Euro currency pairs traded on Spectrum Markets doubled during this year
  • All-time record high of 163.9 million securitised derivatives traded on Spectrum in September

Spectrum Markets, the pan-European trading venue for securitised derivatives, has published its SERIX sentiment data for European retail investors for September, highlighting strong bearish trading on the Euro against the British Pound and Japanese Yen, in contrast to wider market sentiment on these currencies.

The SERIX value indicates retail investor sentiment, with a number above 100 marking bullish sentiment, and a number below 100 indicating bearish sentiment. (See below for more information on the methodology).

“We know retail investors active on Spectrum Markets typically use these derivative products as part of a wider strategy, for example to gain a leverage effect or hedge position elsewhere in their portfolio. It’s likely this kind of tactical exposure explains some of the bearish activity we’re seeing on the Euro, particularly against the Pound and Yen which have both had a pretty tough time recently,” explains Michael Hall, Head of Distribution at Spectrum Markets.

More recently, the proportion of trading related to Euro currency pairs on Spectrum Markets has grown significantly, doubling in the last two months when compared to the start of the year, as these products gain favour with retail investors, particularly for short-term tactical trading in response to events like the UK government’s mini-budget and the Bank of Japan’s recent currency interventions.

“We can identify a growing interest among retail investors in Euro-linked Turbo Warrants as a way of gaining specific, targeted exposure to global FX markets. As markets are becoming increasingly volatile, FX risks are rising, and some investors are seeking to hedge currency exposure with securitised derivatives in order to build some protection into their portfolios. International companies have always hedged against currency risk to some extent, and retail investors are now following the same principle,” adds Hall.

In September 2022, a record high of 163.9 million securitised derivatives were traded on Spectrum, with 37.3% of trades taking place outside of traditional hours (i.e., between 17:30 and 9:00 CET).

87.8% of the traded derivatives were on indices, 3.5% on commodities, 7.6% on currency pairs, 0.8% on equities and 0.3% on cryptocurrencies, with the top three traded underlying markets being DAX 40 (28.3%), S&P 500 (23.9%) and NASDAQ 100 (16.4%).

Looking at the SERIX data for the top three underlying markets, the DAX 40 shifted to a neutral 100 from 99. Meanwhile, the S&P 500 slightly increased from a bearish 97 to 102 and NASDAQ 100 saw a similar rise, from 98 to a bullish 102.

Calculating SERIX data

The Spectrum European Retail Investor Index (SERIX), uses the exchange’s pan-European trading data to shed light on investor sentiment towards current development in financial markets.

The index is calculated on a monthly basis by analysing retail investor trades placed and subtracting the proportion of bearish trades from the proportion of bullish trades, to give a single figure (rebased at 100) that indicates the strength and direction of sentiment:

 

SERIX = (% bullish trades – % bearish trades) + 100

Trades where long instruments are bought and trades where short instruments are sold are both considered bullish trades, while trades where long instruments are sold and trades where short instruments are bought are considered bearish trades. Trades that are matched by retail clients are disregarded. (For a detailed methodology and examples, please visit this link).

 

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