Tuesday 26 January 2010

Contra trading a proven source of liquidity

It is erroneous to blame contra trading for the less-than-desired outcome resulting from leveraged products. On the contrary, contra trading provides an excellent source of liquidity for derivatives such as structured warrants.

1 comment:

Guanyu said...

Contra trading a proven source of liquidity

We refer to the Hock Lock Siew commentary ‘Time SGX moves to T+1, scrap contra’ (BT, Jan 19).

It is erroneous to blame contra trading for the less-than-desired outcome resulting from leveraged products. On the contrary, contra trading provides an excellent source of liquidity for derivatives such as structured warrants.

Failure of a leveraged product to take off is more due to low acceptance by retail investors. Leveraged products are not suitable for all investors.

Retail investors are generally averse to risky derivatives and prefer to invest in straightforward securities. Market surveys should be conducted to gauge investor behaviour, needs and wants before launching a new leveraged product so as to target it to an appropriate group of investors.

Therefore, the notion of scrapping contra trading with the objective of ‘forcing’ the investing public to trade leveraged products is a misplaced one.

Such a move would penalise retail investors who are not leverage-biased, by narrowing their existing choices, and it also does not align with the liberalised environment.

Contra trading is a time-tested settlement model which has provided essential liquidity to the marketplace. It has weathered numerous crises, the most recent being the global financial crisis.

While foreign funds can come and go, this form of local liquidity helps to sustain market vibrancy and is even more indispensable during a lull market. It has contributed significantly to daily turnover since the beginning of Singapore’s stock market.

Liquidity begets liquidity and no responsible exchange should attempt to remove any proven source of liquidity.

Together with the role of remisiers as part of the overall risk management system, it has helped to maintain an orderly and timely settlement of transactions on the exchange.

Like any entrepreneur, remisiers, as risk takers, do not fret about taking credit risks. However, they feel that there is a gross injustice when their remuneration is not commensurate with those risks.

This is particularly so for Internet transactions as remisiers are still responsible for credit and post-trading functions.

Perhaps a premium could be added to the existing Internet trades that have a contra feature, and a new, different commission structure can be introduced for Internet investors who opt to pay for their purchases upfront with no contra.

Whether it is T+1 or T+3, the settlement time frame should ensure consistent trading rules, promote liquidity and efficient operation of the marketplace in order to preserve its trust and integrity.

Moving towards T+1 may be taken as a long-term plan and should be pursued only when the marketplace has grown in capacity and maturity in the far future. All aspects and implications of moving into uncharted territory must be thoroughly examined.

It may be feasible to incorporate T+1 in the previously proposed ‘cash market’ to function in tandem with the T+3 to enhance market vibrancy with more cross-trading activities through hedging, arbitraging opportunities and spread trading between stocks.

The current T+3 settlement, which has withstood the recent global crisis, has proved to serve the marketplace with stability and orderliness.

As such, we believe any change to the prevailing settlement time frame is unnecessary. We are confident that the current T+3 settlement is optimal and will continue to serve the market well.

Albert Fong
President
The Society of Remisiers (Singapore)