eThesis - Kauppakorkeakoulun sähköiset gradut

Abstract:

The aim of this thesis is to study the development and nature of the Finnish retail derivative markets during 2003-2012 in the Nasdaq OMX Helsinki exchange. The focus is on warrants, turbo warrants and novel products, such as different kinds of certificates. Even though these instruments have been popular amongst retail investors, academic research in the area is scarce. Thus, the purpose of this thesis is to shed light on the markets and study how they have developed during the years. Findings in the empirical section are complemented by interviewing financial markets professionals. Among many characteristics studied in this thesis, I introduce a model to estimate revenues for the banks and brokers from trading activities. Also, I study how the trading costs i.e. spreads differ between the instruments and study whether investors are ignorant of spreads or not.

In the empirical section I find that trading with plain vanilla warrants and turbo warrants in Finland has collapsed, and investors are favouring novel products, such as different kinds of certificates. Warrant turnover in Finland has decreased from nearly 647 million euros in 2006 to about 111 million euros in 2012, whereas turbo warrant trading has decreased from 1.5 billion euros in 2006 to 244 million euros in 2012. At the same time, certificate trading has increased from 12 million euros in 2009 to almost 365 million euros in 2012. Figures before include both OMX exchange and NDX exchange turnovers. In the interview section of this thesis, financial market professionals state the financial crisis of 2008 to be the explaining factor in the crash of the markets. Also, it is argued that investors are now favouring easier products, such as certificates. On pricing, the markets professionals argue that banks often use modified pricing formulas, and that prices in the retail derivative markets are often higher than in the option markets.

The estimate for the revenue for banks and brokers during 2003-2012 is roughly 200 million euros, i.e. 20 million euros per annum. Most of the revenue is generated through spreads, and from plain vanilla warrants, whose spread was larger, on average. Furthermore, it was shown that investors are somewhat ignorant of the spread size for spreads as high as nearly 30%. However, investors seem to trade less with instruments whose spread is very high, such as 50%.