CAI JIN

More haste, less speed in move-over to collateralised trading

That's what SGX needs to bear in mind as it moves to scrap contra trading

It is tough to recall another time when stock market conditions in Singapore were so quiet.

Remisiers - the self-employed brokers who earn an income from handling stock trades on behalf of their clients - now consider a good trading day to be one when market turnover breaches the $1-billion mark.

Last Wednesday, for example, market turnover was only $675.1 million. That's a far cry from, say, 2007, when around $2.39 billion worth of shares changed hands each day.

The usual factors - collapsing oil prices and threat of a possible interest rate hike by the United States - have been cited as reasons why investors are avoiding the Singapore stock market. After all, with the Straits Times Index plunging 15 per cent this year, who can blame them for staying away when wading in may cost them money?

The new rule will require investors to put up a minimum 5 per cent collateral on unsettled trades by the end of the trading day. When the proposal was mooted two years ago, the objective was to enforce collateralised trading once the SGX completed revamping the Central Depository with the launch of its new post-trade system. That point is expected to be reached in the next several months.

Market operators also attribute the falling turnover to a dearth of retail participation, describing many dealing rooms as "quieter than a graveyard" as clients stop ringing their remisiers to place orders.

And as the new year looms, so does a new worry: Will the already-poor retail participation weaken further as the Singapore Exchange (SGX) moves to implement further structural reforms?

One big worry is the timeframe for the implementation of collateralised trading to replace the somewhat-arcane practice now in place whereby brokers offer up to three days' credit to clients to settle outstanding purchases without their having to put up any cash or stocks as collateral.

The new rule will require investors to put up a minimum 5 per cent collateral on unsettled trades by the end of the trading day.

When the proposal was mooted two years ago, the objective was to enforce collateralised trading once the SGX completed revamping the Central Depository (CDP) with the launch of its new post-trade system. That point is expected to be reached in the next several months.

But contra trading has been around for decades, and trying to scrap it is likely to run into considerable opposition from remisiers, even though this is being done with their interests at heart.

This is because remisiers have to shoulder enormous risks: they have no access to their clients' finances and CDP accounts while at the same time earn only a paltry commission on each trade.

There is also the systemic risk arising from the huge "contra losses" suffered by broking houses when speculative trading gets out of hand and traders start riding on the free credit to take huge bets.

The last time this arose was in October 2013, when three counters - Liongold Corp, Blumont Group and Asiasons Capital - went into freefall. The stockbroking fraternity reportedly chalked up more than $100 million in losses, with one remisier alone purportedly losing $17 million.

But contra trading makes up less than one-third of overall market turnover, despite the outlandish risks it attracts.

Hence, it would appear to be better to press ahead with the proposed move-over to collateralised trading, despite the storm of protest likely to be whipped up by remisiers.

But I recognise the difficulties in getting traders to post collateral on their trades if they are used to years of contra trading.

Given the lacklustre market conditions, even the infrequent investor may skip trading altogether if he has to cope with the hassle of putting cash with his broker before he can buy a stock.

Anecdotal evidence from recent market history suggests that timing is of the essence in implementing a change as sweeping as the scrapping of contra trading.

I recall the huge anxiety among the stockbroking fraternity when the SGX's predecessor, the Stock Exchange of Singapore, started to roll out scripless trading in April 1990. Like the fears now encountered over collateralised trading, remisiers then expressed concern that the speculative fizz would be squeezed out of the market once scripless trading went "live". This was because traders were no longer able to do "cash settlements" - that is to sell a stock and collect payment on the same day. Payment under scripless trading would be made only four days later.

But their worries were unfounded. As Singapore glided into its biggest bull run in history, scripless trading turned out to be a boon as it enabled brokerages to cope with the huge turnover.

A scrip-based trading system would have collapsed, literally, under the weight of the scrip to be delivered among broking houses each trading day - and the enormous amount of time and effort required to track each physical scrip. What also sweetened the sentiment was a series of very successful listings, such as GK Goh Holdings and Hotel Plaza, that delivered double-digit gains in percentage terms on their debut and helped investors to quickly warm to scripless trading.

When the Hong Kong Stock Exchange introduced off-site trading 20 years ago, it also encountered considerable resistance from brokers who were used to manually matching trades face-to-face or over the phone on the centralised trading floor. But as the Hang Seng chalked up an impressive gain of 34 per cent that year, opposition evaporated as brokers discovered that they were better able to cope with the huge run-up in trading volumes operating from their own offices.

These two events make me wonder if scrapping the 90-minute lunch break to facilitate continuous all-day trading, and the minimum trading price issue would have aroused the huge resentment that they did among remisiers if they had been introduced during a more opportune time.

If continuous all-day trading was introduced, say, in a period similar to the mega bull run in 1993, when brokers would gladly forgo their sleep at night to catch up with the huge backlog of paperwork chalked up during trading hours, what would its reception have been like?

Similarly, would there have been a big fuss over the minimum trading price if we were experiencing a red-hot IPO market?

In other words, it would be better to get collateralised trading off the ground when market sentiment is bullish - when investors would be all too willing to post collateral, if only to get their trades executed.

The problem is that it is tough to predict when the next mega stock market bull run will emerge.

But as the new year kicks off, a word of caution is due: More haste and less speed will be needed if the SGX is to successfully implement collateralised trading.

A version of this article appeared in the print edition of The Straits Times on December 14, 2015, with the headline 'CaiJin More haste, less speed in move-over to collateralised trading'. Print Edition | Subscribe