High-frequency trades drove impressive turnover climb, bankers say
Structured warrants trade in Singapore jumped to a 4.5-year peak last month, registering a 57% increase month-on-month to S$715m, the Singapore Exchange (SGX) reported last week. On an annual basis, the turnover more than doubled, with an increase of 116% from May 2015.
The rise follows a 16% increase in April, when turnover reached a two-year peak and was driven mainly by so-called high-frequency traders, according to industry sources.
"The increase in trading volume in Singapore warrants has been generated primarily by algorithmic high frequency trading (HFT), which now represent more than 80% of traded volumes," said Barnaby Matthews, head of derivatives SEA, Macquarie Securities Group.
"HFT traders use ultra-fast trading systems to take advantage of the market making provided by issuers. They use a strategy termed "latency arbitrage" to make relatively risk free profits, simply because they have a faster system then the market makers," Matthews said.
When competition intensifies and issuers begin quoting tight margins, algo traders surface to take advantage, said a Hong Kong based banker.
In terms of issuers, turnover of UBS warrants almost quadrupled month-on-month while. Macquarie's absolute turnover was also on the up, adding around 15%. Vontobel remained a relatively marginal player.
Although regulators could take steps to address HFT , the Hong Kong banker argued that the issue is an inevitable consequence of a maturing market.
"As long as there's no collusion between the issuer and the traders, I don't think there's much you can do to negate algo trading, unless you impose very high commission fees," the banker said. "Stopping issuers from quoting tight is what killed the Korean market".
Matthews pointed out that HFT activity has reduced the liquidity of the warrant product for ordinary investors. "HFT has become a global problem in listed derivatives with many markets suffering its effects, but is accentuated in retail products like warrants."
In Singapore, the Hang Seng Index (HSI) again dominated amongst underlyings last month, with 21 out of the 25 most traded warrants being linked to the Hong Kong benchmark, up from 16 out of 25 for April. Weighted by value, HSI-linked products accounted for over 80% of turnover, down from 83% in April.
Investor appetite for HSI remains strong because "the index is quite dynamic and the products offer very high gearing", as opposed to single stocks, which are "quite boring, with very low volatility", according to one banker involved with the Singapore warrants market.
Meanwhile, the proportion of call warrants logged a marked increase. Call products accounted for over 72% of turnover, as compared with just under 59% in April.
HSI bullishness, in particular, climbed despite the index closing the month in the red for the first time since February. The HK stock benchmark dropped 1.2%, following a rally in excess of 10% over the previous two months. The Straits Times Index (STI), widely regarded as the premier benchmark for the Singapore stock market, was also in the negative, down 1.67%, but investor bets remained largely neutral.
Single-stock warrants were less popular last month, claiming only 6.2% of the total turnover, down from 13.6% in April. The most in-demand single-stock underlying in May was DBS Bank, accounting for just over 2.4% of the aggregate turnover. Warrants on rival banks UOB and OCBC Bank got about 0.8% of the overall trade each. No other single-stock underlying passed the 0.5% percent threshold.
The record Q1 earnings reported by DBS in late April prompted a run on bullish bets on the financial behemoth, with call warrants accounting for nearly 85% of all DBS-pegged trade, up from 72% for April. The company posted 'particularly satisfying' S$1.2bn in net profit, despite the 'challenging conditions'. DBS' stock closed the month with a minor gain of 1.44%.
Investor interest in the other major stocks remained relatively unchanged, but broadly bullish.
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