Over the past five years, India and Brazil have emerged as two of the fastest-growing derivatives markets in the world, while the Middle East ranked as an important new area of growth in a recent FIA derivatives survey. According to exchange leaders from these regions, growth will continue, buoyed by a rising number of foreign investors and retail traders participating in the markets.
In the Middle East, the Saudi Exchange, known as Tadawul, has grown to become the ninth-largest exchange by market capitalisation. Although officially formed in 2007, the modern journey of the exchange began in 2016 under Saudi Arabia’s Vision 2030 project, aimed at diversifying the Kingdom’s economy and attracting foreign investment. Arguably, a pivotal moment for the exchange came in 2019 when it began listing state-owned Saudi Aramco, the world's largest oil producer.
“That made the exchange globally relevant, and we have not looked back,” said Lee Hodgkinson, group strategy officer of the Saudi Tadawul Group, the parent company of Tadawul, speaking on a panel at last month’s FIA Boca conference.
“The early part of our development was around the core equity capital market franchise and a bit of debt market. Now we are moving into the derivative space,” Hodgkinson said. “When I joined, we had 50 qualified international investors. Three years on, we have four and a half thousand. The growth has been quite phenomenal.”
In 2020, the exchange enhanced its offerings with the launch of a derivatives market and clearinghouse. Two years later, it introduced a market-making framework for its stock and derivatives markets to boost liquidity and raise price-determination efficiency. Last year, it joined CME Group as a major stakeholder in the Dubai Mercantile Exchange – rebranded as the Gulf Mercantile Exchange – which lists the Oman crude oil futures contract. The move coincided with a growing demand for oil futures among individuals and businesses in Asia, particularly in China.
“We will also be expanding [the GME] into other asset classes,” Hodgkinson told the audience. “A global South-South cooperation, which I think used to be a side show, is now becoming front and centre. Trade between Brazil and Saudi is substantial and it is clearly the same with India. There is a new derivatives and commodities superhighway forming across the world, and we're all part of that.”
Young demographic
India has been at the forefront of the rising volume trend in global exchange-traded derivatives markets. In 2024, its equity options markets accounted for 89% of volumes globally, according to FIA data. While a source of concern for India’s policy makers, a rapid rise in retail participation has been a key driver of this growth.
“India has a very prescriptive, retail-oriented ID market, which is a unique proposition to start with, with most of the retailers having great trading capabilities, particularly in options,” said Sundararaman Ramamurthy, managing director and chief executive officer of the Bombay Stock Exchange. Speaking on the same panel as Hodgkinson, he said growth in India’s financial markets is sustainable due to the country’s many advantages, such as a young demographic and megatrends like digitalisation.
“From a macro perspective, the median age in India is 29 – it is a very old civilization with a very young population. Around 60% of the population is in the income-earning age bracket – 18 to 65 – which is a big advantage,” Ramamurthy said. “Wealth creation is high because of the very high GDP growth rate. There is also a good amount of investment happening, and the initial public offering pipeline is extremely strong. We have 60 million small and medium enterprises, and more and more are coming into the mainstream market to be listed.”
Speaking about BSE, the oldest exchange in Asia and the second largest in India behind the National Stock Exchange in terms of volume, Ramamurthy said it is in a “catch-up growth” phase after “languishing for many years.”
“There was de-growth, not growth, and now we are catching up. BSE is improving its infrastructure – human, physical, technology and technical – and this will ensure sustainable growth in the future,” he said.
Brazilian experience
Another market that FIA survey participants highlighted as having high growth potential is Brazil, home to B3, one of the largest exchanges in the world and by far the biggest in Latin America. B3 offers systems and services for the equity, derivatives and commodity markets, as well as for fixed income securities, investment funds, government bonds and spot foreign exchange.
“We have a diversified client base trading in our exchange. Brazil is a big country with a little over 200 million people. More than five million individuals trade on the exchange, and it has been growing rapidly with the digitalisation of banking in the country, bringing a lot of new investors into the investment community,” said Luiz Masagão Ribeiro Filho, chief product and client officer at B3, speaking on the same panel.
“We also have a big asset management industry with around $1.7 trillion in AUM, most of those assets allocated and traded internally,” he added. “We have a strong local banking industry, which is another source of liquidity into our markets, and we have growing participation from the foreign investor community – institutional investors, real money investors, hedge funds and all the big market makers and HFT players.”
Brazil's economy is currently facing well-publicised challenges with both inflation and fiscal issues, something that Masagão acknowledged. He noted how this has resulted in decreased investment in equities from a decline in new companies listing and new investors coming into the market. However, the exchange has seen a boom in its fixed income business.
“The main source of growth for us has been fixed income products. We have the DI [One-Day Interbank Deposit Futures] contract, which is in the top five most liquid contracts in the world. We also have the phenomenon of new retail clients entering the market,” Masagão said.
The main driver of retail growth has been the entrance of highly developed fintechs, mainly focused on digitalising the investment experience for clients and educating the population on how to invest, he added. Brazil stands out as the leading fintech hub in Latin America, with the highest number of fintech companies in the region.
“They brought a lot of new players into the exchange, and we have been focusing on launching new products and other opportunities to serve these new investors. We created the first wave of mini and micro contracts, and last year we started offering crypto, a very retail-oriented product, which has been a huge success. We are now looking into other options,” Masagão said.
Opportunities and expansion
The exchange leaders also discussed new products and asset classes on their respective radars. Saudi Tadawul Group’s Hodgkinson highlighted three areas for potential growth – fixed income, equity derivatives and commodities.
“As the Kingdom becomes a net importer of capital rather than an exporter, the world of fixed income will be much more important and there is a tremendous amount of work going on in that space,” he said. "Second, equity derivatives such as index futures for international hedgers and individual equity options for retail traders. There is a lot of retail trading in those products in the US from Saudi Arabia. The third area is commodities via the Gulf Mercantile Exchange. These all present an exciting set of opportunities for us.”
Hodgkinson added that the long-term vision is for the GME to be a physically settled market, something that the other panellists highlighted as being important to them, too.
“Our game plan, fundamentally, with CME as our partner, is to provide a real economy set of risk tools and we want benchmarks at the point of production, rather than the point of consumption. We very much want this to be a central hub in connecting the South-South superhighway of commodities,” Hodgkinson said.
“This is a long-term vision, but I do believe that our exchanges will do more together in the years ahead. The model of years gone by was one where a Brazilian product might be priced in London or New York. I think this is going to change. Maybe not in those legacy products, but when you think about battery metals or hydrogen, those products should be priced in Saudi. We want [GME] to be a physically settled market, and we want it to be focused on risk transfer for real economy actors,” Hodgkinson said.
B3’s Masagão agreed, pointing out that Brazil is the biggest producer of soybeans, which is priced in Chicago, and the biggest producer of sugar, which is priced in New York.
“It’s a big effort for the exchange and the trading companies to look at how to build the physical delivery infrastructure so that producers can migrate the trading to our venues. This is a big focus, but it has been a historical challenge. We are not going to give up because this is very important for the country and the local producers,” he said.
For B3, an area of interest is electricity, which Masagão described as a frontier market where he sees a lot of growth and potential. “Electricity trading is significant in Europe, and in the US, there are three or four exchanges trading regionally. We see a lot of financial players entering the electricity trading market,” he said. “We are investing in a new exchange for that.”
BSE’s Ramamurthy also highlighted three potential growth areas – commodities, fixed income and electricity.
“India consumes many of the commodities that it is trading, but they are not priced here, so there is some amount of effort required to make India’s commodity markets deeper, broader and vibrant,” he said.
“The second is fixed income. If you have a very active government bond curve and an active corporate bond curve for different ratings, you know how to price the tenure and how to price risk. That needs to be developed in India, and that will give birth to a very good underlying interest rate market, a derivatives market and a credit market. The other thing to watch for is electricity, which has started gaining some momentum but is not yet fully fledged. These are the three things that we should have front of mind when talking of India.”
