BMD’s support for professional traders to set up proprietary trading firms starting to bear fruit.
Bursa Malaysia Derivatives Bhd (BMD) has put in place various initiatives to make its derivatives market more vibrant through the addition of new investors, both retail and institutional.
In particular, the exchange has been supportive of efforts by professional traders to set up their own proprietary trading firms under the Associate Participant (AP) framework to maximise business opportunities.
By encouraging locals to institutionalise, it aims to increase their activity on the derivatives market as well as cultivate greater mentorship in the marketplace. To help efforts to institutionalise their trading practice, Bursa Malaysia reintroduced the participantship fee waiver and streamlined the application process last year.
Smart Investor talks to two futures traders – Yong Chen Chook of Straits Index (M) Sdn Bhd and Calvin Ng of Iceberg X Sdn Bhd – on why they decided to set up their own proprietary trading firms, their trading strategies and tips on how to be successful in trading futures.
Yong Chen Chook, founder and director of Straits Index (M) Sdn Bhd
Smart Investor: What motivated you to institutionalise by establishing Straits Index (M) Sdn Bhd?
Yong Chen Chook: Firstly, it’s teamwork – I can hire and train up traders, which will in return help me to grow the business. Institutionalising helps to gather traders and trading volume. This will allow us to offer better rewards in terms of incentives, brokerage and facilities. It also allows us to adopt multiple strategies as each trader can carry out one strategy, which lowers the risk with diversification.
Why did you decide to switch to trading the futures market?
Futures instruments can be traded through good and bad markets, so it is suitable for full time trading. Using margin in futures allow for leverage of capital and it is interest free, and hence it is suitable for trading it as a business.
Being able to short sell in futures means we can hedge our bad positions, and so with proper risk management, trading risk is greatly reduced.
Is futures trading only for the brave and not the fainthearted investor?
Certainly not – with careful planning and good strategy, futures trading can be “boring”. It is all about strategy. For example, Spread Trading is one of the strategies that artificially “slow” down futures prices, and open a variety of trading opportunities that is not dependent on the direction of an underlying asset.
Futures trading is sometimes perceived as risky. In my opinion, futures do not increase the risk, but it is the trader who over leverages against the capital that poses the risk of trading. So, if you over leverage, even buying a house that supposed to be low risk, it is risky.
How does Bursa Malaysia Derivatives (BMD) offer support to Associate Participants?
BMD has been supporting me from when I was an individual member (Local Participant) to currently as an Associate Participant (AP). In addition, BMD has various incentive programmes that helps us to start and grow our trading business. They also have various educational programmes, symposiums and conferences that allow us to stay relevant in the changing market.
Can you share some useful tips on how to trade futures without getting your fingers burnt?
Usually most newcomers just look at accuracy or winning in trading futures or any other instruments. I suggest looking at other aspects like risk and money management in trading. One will get burnt if he over trades, but it is very hard to judge if one is over trading.
Futures trading involves leveraged instruments, so that is why when you are correct, the returns are high. But it is also a double-edged sword that hurts your capital when you are wrong. So set a reasonable expectation and have a long-term goal rather than say wanting to make 100% in one year.
What is your long-term aspiration for Straits Index?
To grow the company equity; recruit and train traders that can handle my trading eventually; and expanding into automatic and algorithmic trading when we are ready.
Calvin Ng, director of Iceberg X Sdn Bhd
What factors influenced you to switch to trading the futures market?
Calvin Ng: For stocks, short selling is largely restricted or discouraged in Malaysia. With the fast information flows nowadays, economic cycles have become shorter and shorter. Hence, the ability to short (either to speculate or to hedge) will be an added advantage.
What prompted you to set up Iceberg X?
Iceberg X was established on 3 Jan 2018 by Andre Leong and myself. We set it up to take advantage of tax incentives (as a company) i.e. a tax bracket of only 18% (up to taxable income of RM500,000). However, taxable income exceeding RM500,000 is at the normal tax rate of maximum 24%, which is still lower than the maximum individual tax rate of 28%.
Another reason to set up Iceberg X is to build up a track record for an eventual move into fund management.
Since setting up your proprietary trading company, has its growth been to your expectations?
It was slower than what we expected, as the market is getting more challenging nowadays. Nonetheless, we won’t be swayed away by the challenges, but will adapt to it to remain competitive.
How big is your trading team currently? What qualities do you expect your traders to possess?
There are nine of us. A good trader must possess strong discipline, extensive knowledge of markets, a willingness to learn,and strict money management skills.
What are the key differences between trading stocks and trading futures?
The answer in one word: Leverage. This makes futures trading much more riskier than trading stocks.
A KLCI Index Futures contract is about RM82,500 in notional value, and you only need a margin of RM4,000 to initiate (buy or sell) one contract (which translates into a leverage of over 20 times). Whereas for stocks, you need to pay the full margin on the stock you buy. To ensure traders do not over leverage, we monitor their margin utilisation rate. At any point in time, that ratio should not exceed 50%.
For futures trading, you can lose more than the deposits/margin you put in. For example, you start to trade futures with a RM10,000 deposit/margin. When the market moves against you, you can lose more than RM10,000 (compared to a stock, which is limited to the amount you paid for). This is the effect of leveraging.
Can you give some hot tips on how to trade futures successfully?
Never overtrade, and always respect the market. When a trader disrespects the market, he or she will probably end up losing money. Depending on the quantum of the loss, it will be an uphill battle trying to make a comeback (i.e. recuperating losses). Making money is likely one of the biggest motivators for a trader to continue to trade.
What is your vision for Iceberg X?
We are looking to build our team to 20 traders by next year. Ultimately, with a good track record, we will be heading towards fund management.