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Brokers fight for the right to contra tradeBut they may accept tweaks on commission rates, settlement periodBy JAMIE LEE02 March 2010(SINGAPORE) Any move to remove contra trading will be resisted by brokerages, which have recently had informal chats on the subject with the Singapore Exchange (SGX). SGX has not made a public decision on the practice, but sources told BT that the bourse does not intend to get rid of contra trading for now. ‘SGX has informally told the brokers that they’ve not made any formal decision on this,’ said a senior brokerage player. Another market player added: ‘We’ve engaged the exchange to discuss what we had heard through the grapevine. They said there’s no desire on their part to remove contra trading.’ ‘We don’t want anything to be changed,’ he added. ‘If it’s not broken, don’t change it.’ Contra trading is a practice found only in Singapore and Malaysia, under which investors buy and sell a stock within a period of three days, without putting down any money. This is possible under the T+3 system for the settlement of trades, under which trades are settled three business days after the day of transaction. Investors trading on contra - including several remisiers trading from their own pockets - hope to make profits without upfront capital. But with T+1 widely accepted as best practice in reducing settlement risk, market talk is that the days of T+3 and contra trading may be numbered. SGX is also said to be concerned that contra trading here is priced too cheaply relative to its higher risk, which could lead to pressure being put on brokers to push up pricing. Currently, brokerages charge the same commission rate for all trades, contra or otherwise. The rates are tiered based on the value of each trade. ‘We also agree that it is mis-priced, given that people are provided some degree of gearing, and for that, it’s actually very cheap,’ said the second market watcher. ‘So we said, yes, we’ll look at that and at an appropriate time, some of us may wish to re-price it,’ he added. While SGX may not have immediate plans to end contra, market watchers are expecting a shortened settlement period for contra trades. The three-day contra period could be cut to two business days over the next few years, they said. For now, contra trades are just too valuable to the market. Brokerage players argue that while contra trading may be an archaic practice, it remains a critical source of liquidity to the market, making up at least half of the retail volume. The sharp fall in liquidity not only affects the viability of the market but also impacts SGX’s bottom line, brokerage players point out, noting that SGX’s clearing fees could be hit badly. Securities clearing fees constituted 65 per cent of SGX’s total securities market revenue in its half-year ended Dec 31, 2009. Market players have also rebutted criticism that contra trading has stunted the growth of other products such as extended settlements and covered warrants. Instead, brokerages said that such products are flawed and that there is room to develop other longer-dated products. ‘You can’t conveniently blame contra just because a product didn’t take off,’ said the second market watcher. Instead, market watchers see room for longer-dated derivative products, such as single stock options and futures, which have a contract duration of at least three months. Brokerages also think concerns over credit risks are overblown, with one source noting that many of today’s contra trades are closed off within the day as traders do not want to carry overnight positions. ‘It’s not that investors don’t have money to pay up for their losses or take up shares, it’s just that they want the convenience of being able to contra,’ said the second market watcher.
‘In 2007, when the market took a big correction, contra losses for the entire industry were less than a $100 million. In the 1999 crash, the industry had a collective loss of over a $1 billion,’ he added. ‘Risk management now is very different from what it was 10 years ago. We’ve fine-tuned it to an art.’
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