But volatile markets also make it more difficult for banks that issue warrants to hedge their risk. As a result, there were 31 per cent fewer new warrant listings in 2008 - just 1,184 compared with 1,724 a year earlier - as issuers turned more cautious.
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Warrant Turnover Down 25% in 2008
Trading dominated by instruments linked to Hang Seng Index
By CONRAD TAN
6 January 2009
Turnover in Singapore’s warrant market fell by 25 per cent year on year to $21.1 billion in 2008 as investors and issuers turned cautious amid extreme volatility.
But Societe Generale (SG) - one of the major warrant issuers here - expects punters to show renewed interest early this year as equity markets stabilise after the violent swings of recent months.
Fourth-quarter 2008 warrant turnover dipped 3.9 per cent to $3.9 billion compared with Q3, said Ooi Lid Seng, SG’s vice-president for structured products in Asia ex-Japan.
The decline was partly due to a sharp drop in overall trading in equities and derivatives in Q4, after the collapse of US investment bank Lehman Brothers sent share prices worldwide into a tailspin.
Despite the 25 per cent drop in warrant turnover for the full year, ‘the warrant market actually performed quite well relative to total market turnover’, which slumped 36 per cent to $368.3 billion in 2008 from $574.7 billion in 2007, Mr. Ooi said.
As a result, turnover in warrants as a proportion of overall market turnover including stocks rose to 5.2 per cent in 2008, from 4.9 per cent a year earlier.
That proportion is likely to rise to at least 6 per cent this year as more investors turn to warrants to bet on market movements, according to Edmond Lee, SG’s director for equity derivatives in Asia ex-Japan.
In Q4 2008, the average daily turnover in warrants rose 3.9 per cent to $64.5 million from Q3, according to SG.
Trading continued to be dominated by warrants linked to Hong Kong’s Hang Seng Index (HSI) and the Straits Times Index here, which together accounted for 85 per cent of warrant turnover in Q4 and 59 per cent of warrant turnover for full-year 2008.
Trading in HSI warrants alone made up 73 per cent of warrant turnover here in Q4 - up from 49 per cent in Q3 - and 48 per cent of warrant turnover for the whole of last year.
Barnaby Matthews, Macquarie Capital Securities’ head of derivatives in Singapore, said the surge in the popularity of HSI warrants in Q4 was partly due to the sharp increase in stock market volatility at the time.
Warrants are geared instruments, which means they magnify changes in the price of the underlying index or stock, making them popular among traders hoping for a big gain in a short time.
But volatile markets also make it more difficult for banks that issue warrants to hedge their risk. As a result, there were 31 per cent fewer new warrant listings in 2008 - just 1,184 compared with 1,724 a year earlier - as issuers turned more cautious.
Trading in ‘put’ warrants, which allow investors to bet on falling share prices, rose to 31 per cent of warrant turnover in 2008, from 23 per cent in 2007, a sign that ‘puts’ are gaining in popularity here, said SG’s Mr. Ooi.
Call warrants, which investors use to bet that share prices will rise, made up the rest of turnover.
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