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SGX must strike balance between derivatives and equities

In the past few years, Singapore has largely looked to major markets like New York to enhance its standing as an international financial centre. Therefore, we try very hard to follow the ways such markets develop.

One of these is the introduction of computerised trading and enhanced structuring of derivatives to the extent that derivatives in synthetic form are now commonplace.

A lot of these innovations require the market to have deep liquidity, without which they become destabilising and, at times, destructive.

Singapore lacks that deep liquidity and the introduction of these trading tactics and instruments inadvertently facilitates the not uncommon one-way bets on the short side.

This may explain the market's consistent weakness and deterioration over the years.

In the worst-case scenario, companies can be destroyed, severely hurting investors and stakeholders. The ones who win are players who simply have no interest whatsoever in the real business that a company conducts, let alone the economy.

A perception develops that there is no real investor protection in Singapore.

The Singapore Exchange (SGX) was named Derivatives Exchange of the Year last year, the second year in a row. I fear that this award came with a price that was paid by the equities side of SGX.

Ironically, the lack of substantive initial public offerings (IPOs) may be due to the perceived high risk of listing here due to the market's inability to absorb the volatility caused by predatory computerised and derivatives trading.

Most successful businesses still aspire to list. So the stock market remains integral and important to every economy.

In this respect, SGX must decide what role it wants to play. Does it want to resemble a betting centre or does it want to be a major player in the development of our economy?

Perhaps SGX could consider how it can offer businesses a place for listing, free from the distortions and disruptions caused by predatory computerised and derivatives trading.

Undoubtedly, the derivatives side of SGX's business is important, but SGX must do better at striking a balance. It is hoped that SGX will realise that if it fails again to attract substantive IPOs this year, the risk that our market becomes irrelevant may ratchet up.

Tng Kim Bock

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A version of this article appeared in the print edition of The Sunday Times on January 24, 2016, with the headline SGX must strike balance between derivatives and equities. Subscribe