It will be a pity to let such a promising market languish after the efforts to build it up
By Goh Eng Yeow 09 November 2009
After experiencing explosive growth for the past few years, the covered warrants market in Singapore seems to have fallen off the cliff.
Even though the bulls have been charging non-stop in the stock market since March, they seem to have left warrants behind in their trail of dust.
Data furnished by French bank Societe Generale - a warrant issuer - shows that the trading of warrants has shrunk by about two-thirds to a mere 2.5 per cent of total market turnover in the third quarter, from 6.1 per cent in the first quarter this year.
This is surprising, considering that covered warrants offer investors the chance to bet relatively cheaply on price movements of blue chips or popular stock indexes like the Straits Times Index or Hong Kong’s Hang Seng.
With a warrant, an investor can buy into a stock at a fixed price within three to nine months. And they are cheap because a holder needs five or 10 warrants plus the ‘strike’ price to buy a single share.
These were the key attractions in luring investors to load up on warrants in a big way in the 2005 to 2007 bull run, causing total annual turnover to treble from $10.6 billion in 2005 to $28.2 billion.
It is a very different story now, as calm returns after the huge storm that hit global equities markets last year.
One warrant issuer noted that the warrants market had not been able to weather the problems thrown up by the financial storm. ‘The first big test that comes along - people get cold feet and want out,’ he observes.
The scariest aspect for warrant investors were the violent swings in warrant prices - a 30 per cent to 40 per cent daily price swing was quite common last year - as market conditions turned volatile. This caused brokerages to turn cagey about promoting warrants, as their clients suffered huge losses.
To limit their credit risks, some brokerages also curbed Internet trading of warrants altogether - as the losses from their clients mounted. This has, in turn, deterred retail investors from making bets on warrants as market conditions improve this year, as they turn their attention to punting on penny stocks instead.
As a result, the warrants market has suffered such a big setback that all the good work in building up the sector in the past four years might be wiped out. Annual turnover for this year has fallen back to 2005’s $10 billion level when the market began its meteoric rise.
The warrants market also faces a stiff challenge from the emergence of another financial leveraged product known as Contracts for Differences (CFDs), which is actively promoted by some brokerages.
Put simply, a CFD works like a share margin trading account. When an investor buys a CFD on a blue chip, he puts up 10 per cent of the cost of owning the stock. As the CFD tracks the stock, he can immediately track his gain or loss simply by glancing at the share price of the counter concerned.
Unlike warrants, they have no maturity date.
The catch is that they are not traded on the Singapore Exchange, and they are not regulated in any way. Holders of such financial derivatives can kiss their money good bye if the CFD providers go under.
Given the possible default risks which arise from trading CFDs, is it wise to let the warrants market languish?
Some will argue that the huge daily volumes which warrants had attracted in the past four years reflected investor appetite here for such instruments. Other major regional markets such as Hong Kong and Seoul, for instance, have not suffered any massive drop in warrants trading, despite last year’s calamity.
In Hong Kong, warrants contribute about 20 per cent of total daily market turnover, while in Seoul, a relatively new warrants market, they make up about 15 per cent of daily market activity.
To be fair, the Singapore Exchange has started tackling some of the concerns raised in recent years about warrant trading.
In September, it issued a consultation paper to cut the bid size - the minimum difference between a buyer’s bid and a seller’s offer - for stocks priced below 20 cents to a mere 0.1 cent from 0.5 cent.
This will make trading of warrants, which are usually priced around this range, more efficient and more responsive to any change in the price of the underlying shares they are tracking.
But more can be done to address traders’ gripes over the tardiness of warrant issuers to disclose the outstanding positions of their various warrants.
In Hong Kong, banks are required to make full disclosure of such information daily: the quantity of warrants bought and sold and the prices. In Singapore, only quarterly reporting is needed.
Warrant traders complain that such a lack of transparency turns them off. Their counterparty - usually the warrant issuer - enjoys an unfair advantage in pricing bids and offers with the information it holds.
Some warrant issuers also want a review of the current market practice of giving a buyer four days’ grace to make payment for share transactions.
Given the risks thrown up by the global financial crisis, they argue that perhaps such an archaic practice should be abolished.
This was in view of the horrendous losses suffered by traders last year, as they were tempted into high-wire plays, ‘getting in and out’ of a stock or warrant quickly in the hope of making huge gains, as prices swung wildly.
Trading of warrants will get a big shot in the arm if SGX brings its practice in line with other major markets such as the United States, by insisting that a trader has to pay upfront before trading in financial derivatives.
Whether the SGX takes heed of the remedies which have been proposed remains to be seen. But it will be a big pity to let such a promising market slip into oblivion after the tremendous efforts to build it up.
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Waking the warrants market from its slumber
It will be a pity to let such a promising market languish after the efforts to build it up
By Goh Eng Yeow
09 November 2009
After experiencing explosive growth for the past few years, the covered warrants market in Singapore seems to have fallen off the cliff.
Even though the bulls have been charging non-stop in the stock market since March, they seem to have left warrants behind in their trail of dust.
Data furnished by French bank Societe Generale - a warrant issuer - shows that the trading of warrants has shrunk by about two-thirds to a mere 2.5 per cent of total market turnover in the third quarter, from 6.1 per cent in the first quarter this year.
This is surprising, considering that covered warrants offer investors the chance to bet relatively cheaply on price movements of blue chips or popular stock indexes like the Straits Times Index or Hong Kong’s Hang Seng.
With a warrant, an investor can buy into a stock at a fixed price within three to nine months. And they are cheap because a holder needs five or 10 warrants plus the ‘strike’ price to buy a single share.
These were the key attractions in luring investors to load up on warrants in a big way in the 2005 to 2007 bull run, causing total annual turnover to treble from $10.6 billion in 2005 to $28.2 billion.
It is a very different story now, as calm returns after the huge storm that hit global equities markets last year.
One warrant issuer noted that the warrants market had not been able to weather the problems thrown up by the financial storm. ‘The first big test that comes along - people get cold feet and want out,’ he observes.
The scariest aspect for warrant investors were the violent swings in warrant prices - a 30 per cent to 40 per cent daily price swing was quite common last year - as market conditions turned volatile. This caused brokerages to turn cagey about promoting warrants, as their clients suffered huge losses.
To limit their credit risks, some brokerages also curbed Internet trading of warrants altogether - as the losses from their clients mounted. This has, in turn, deterred retail investors from making bets on warrants as market conditions improve this year, as they turn their attention to punting on penny stocks instead.
As a result, the warrants market has suffered such a big setback that all the good work in building up the sector in the past four years might be wiped out. Annual turnover for this year has fallen back to 2005’s $10 billion level when the market began its meteoric rise.
The warrants market also faces a stiff challenge from the emergence of another financial leveraged product known as Contracts for Differences (CFDs), which is actively promoted by some brokerages.
Put simply, a CFD works like a share margin trading account. When an investor buys a CFD on a blue chip, he puts up 10 per cent of the cost of owning the stock. As the CFD tracks the stock, he can immediately track his gain or loss simply by glancing at the share price of the counter concerned.
Unlike warrants, they have no maturity date.
The catch is that they are not traded on the Singapore Exchange, and they are not regulated in any way. Holders of such financial derivatives can kiss their money good bye if the CFD providers go under.
Given the possible default risks which arise from trading CFDs, is it wise to let the warrants market languish?
Some will argue that the huge daily volumes which warrants had attracted in the past four years reflected investor appetite here for such instruments. Other major regional markets such as Hong Kong and Seoul, for instance, have not suffered any massive drop in warrants trading, despite last year’s calamity.
In Hong Kong, warrants contribute about 20 per cent of total daily market turnover, while in Seoul, a relatively new warrants market, they make up about 15 per cent of daily market activity.
To be fair, the Singapore Exchange has started tackling some of the concerns raised in recent years about warrant trading.
In September, it issued a consultation paper to cut the bid size - the minimum difference between a buyer’s bid and a seller’s offer - for stocks priced below 20 cents to a mere 0.1 cent from 0.5 cent.
This will make trading of warrants, which are usually priced around this range, more efficient and more responsive to any change in the price of the underlying shares they are tracking.
But more can be done to address traders’ gripes over the tardiness of warrant issuers to disclose the outstanding positions of their various warrants.
In Hong Kong, banks are required to make full disclosure of such information daily: the quantity of warrants bought and sold and the prices. In Singapore, only quarterly reporting is needed.
Warrant traders complain that such a lack of transparency turns them off. Their counterparty - usually the warrant issuer - enjoys an unfair advantage in pricing bids and offers with the information it holds.
Some warrant issuers also want a review of the current market practice of giving a buyer four days’ grace to make payment for share transactions.
Given the risks thrown up by the global financial crisis, they argue that perhaps such an archaic practice should be abolished.
This was in view of the horrendous losses suffered by traders last year, as they were tempted into high-wire plays, ‘getting in and out’ of a stock or warrant quickly in the hope of making huge gains, as prices swung wildly.
Trading of warrants will get a big shot in the arm if SGX brings its practice in line with other major markets such as the United States, by insisting that a trader has to pay upfront before trading in financial derivatives.
Whether the SGX takes heed of the remedies which have been proposed remains to be seen. But it will be a big pity to let such a promising market slip into oblivion after the tremendous efforts to build it up.
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