Can new chief revive fortunes of ailing SGX?

Raise trading volumes. Make securities sizzle. Bring back the lunch break. The incoming Singapore Exchange chief has his work cut out for him.


BANKING veteran Loh Boon Chye takes over as chief executive officer of the Singapore Exchange (SGX) on July 14, amid hopes that he will revitalise South-east Asia's second-largest bourse.

Mr Loh is taking the helm when the contrast between the China and Hong Kong bourses and the SGX could not be more stark.

China and Hong Kong are charging ahead in the year's biggest bull run to date, with the Shanghai Composite Index and the Shenzhen Composite Index having chalked up staggering 12-month returns of 121 per cent and 158 per cent, respectively. Hong Kong has achieved an 18.8 per cent return so far.

Meanwhile, The Straits Times Index has barely kept its head above water with a 1.8 per cent return in the same period.

Except for China and Hong Kong, most bourses in Asia suffered a downturn in trading as foreign investors pulled out, anticipating a tightening of United States monetary policy. In Singapore, trading volumes shrank amid a continued drought in large listings and as the after-effects of a multibillion-dollar penny stock crash in 2013 linger.

This year could well be one of the worst on record for new listings: There are only three so far, raising US$41 million (S$55 million), a fraction of the US$600 million raised a year earlier.

That the average value of shares traded on Singapore's exchange each day trails China, Hong Kong and Tokyo is no surprise, but the fact that it is even lower than that of regional neighbour Thailand, which saw a military coup last year, is definitely cause for concern.

Given the dire statistics, it is no wonder the market is looking forward to a new CEO.

The market has spoken

ALTHOUGH the market has been in the doldrums for some time, it has not been for want of trying. Various initiatives have been rolled out. These include the SGX cutting the standard lot size for stock transactions to 100 shares from 1,000 and the introduction of market makers and liquidity providers.

Despite these and other measures, daily average trading value fell by 2 per cent last month to $1.1 billion from the figure a year earlier. For the month of May, securities turnover was $23 billion, down 2 per cent from the sum a year earlier, underscoring the uphill task the SGX faces.

The outgoing SGX chief executive, Swedish-born Mr Magnus Bocker, who joined the exchange in 2010 from Nasdaq OMX Group, has long tried to improve trading volumes. He tried to form alliances with other exchanges but had limited success. Shortly after joining the SGX, Mr Bocker launched a bold US$8.8 billion takeover bid for Australian exchange operator, ASX, but this was blocked the next year by the Australian government.

He also wanted a link between stockbroking houses in Singapore, Malaysia and Thailand, known as the Asean Trading Link, to evolve into a formal connection between the region's exchanges. But trading activity through the link has been low.

Mr Bocker saw establishing direct connections between exchanges, instead of replacing mergers and acquisitions, as the industry's main growth strategy, particularly in Asia. Last year, there was an agreement with the Taiwan Stock Exchange to cooperate on a study of a cost-efficient link between the Singapore and Taiwan markets, but that has not advanced.

Unhappy remisiers

IT DID not help that a key stakeholder group has grown disenfranchised as securities trading volume waned, along with a growing investor trend to trade through online platforms offering lower commissions.

"Over the past few years, we saw an SGX policy of over-focusing on promoting derivatives to the neglect of the basic stocks and shares sector," said Mr Jimmy Ho, president of the Society of Remisiers (Singapore).

The exchange rolled out derivatives trading based on a variety of Asian assets, from Chinese stocks to the Indian currency. Under Mr Bocker's tenure, trading volumes for derivatives reached record highs, jumping 89 per cent last month from the volumes a year ago, as the bull run in China fuelled activity in the FTSE China A50 futures contract.

The SGX, in its latest earnings announcement on April 22, said derivatives revenue has become an increasingly important revenue contributor, accounting for 40 per cent of its income.

But in creating a booming derivatives business that has helped diversify the SGX's revenues, there has been a negative result. Many remisiers and brokers in the securities business feel they are increasingly being marginalised.

The derivatives segment is largely the preserve of institutions and ultra-wealthy investors as they typically have access to sophisticated strategies. "The retail investing community do not participate in derivatives as much because they may not have as much access," said CMC Markets analyst Nicholas Teo.

Then there is the ongoing unhappiness over the scrapping of the lunch break in 2013. Those who want the lunch break reinstated claim that scrapping it did not raise trading volumes. Instead, it deprives them of the opportunity to meet clients at lunch.

But proponents of all-day uninterrupted trading days argue that this gives investors the flexibility to manage their trading positions at all times, especially when market-moving news breaks. All-day trading is the norm in the US, Europe, Australia, South Korea and India.

Industry wish list

REMISIERS are hoping that Mr Loh, the incoming SGX chief, can help rejuvenate the local market and rebuild relations with the local trading and investing community via a consultative approach. They would like to see the SGX work with dealers and remisiers to show the public that this is not a sunset industry.

Analysts point to Mr Loh's experience as a positive sign that he can help bring back the high-profile initial public offerings that the Singapore market craves.

"He has seen deals and understands what motivates companies to list in Singapore, and why they aren't choosing to do so now," Mr Teo said.

Big public listings here are now rare, no thanks to the collapse of S-chips in 2007, the lingering effects of the global financial crisis and, more recently, the penny stock rout in October 2013. These have combined to drain liquidity out of the local market and lower its standing and valuation in the eyes of the investors.

Some are even pushing for anti-speculation trading regulations introduced in the wake of the October 2013 penny stock crash to be reversed as these are being blamed for the extremely thin volumes.

But these trading rules were also introduced with the aim of making investing in blue chips more affordable, curbing excessive speculation and market manipulation, and improving the quality of listings.

If the quality of the market is improved, then this will make it more attractive to investors, say the proponents of these moves.

And indeed, having been an independent SGX director and a member of its regulatory management committee, Mr Loh has the chops to help improve the regulatory framework further, said Securities Investors Association (Singapore) president David Gerald.

"The listing rules and other legislation must be re-looked to see if there can be practical safeguards against officers in foreign listings committing fraud to the detriment of Singapore investors. Currently, Singapore investors are helpless when officers in foreign listings squander or steal the company's monies," he said.

Still, the biggest question right now is how much the SGX's malaise is due to an over-emphasis on derivatives - and whether this is a neglect of the core securities business, as the remisiers claim, or whether the move to derivatives is just a symptom of more deep-seated challenges.

The growth of China as an economic power would automatically fuel the growth of its stock market, as well as that of Hong Kong's, and divert investors away from the likes of Singapore.

"It also depends on whether investors want to invest in our stock market or buy other markets. They will go to where they think they can make money," said Phillips Securities managing director Loh Hoon Sun.

High hopes

THE incoming CEO is in for a honeymoon period, as the industry regards Mr Loh as an old hand with a local perspective. He will also not be coming in cold to the company as he was an SGX board director from October 2003 to September 2012.

He has spent 26 years in the financial service industry, including leading Deutsche Bank Singapore's investment-banking team in the region, and was most recently deputy president and head of global markets for the Asia-Pacific at Bank of America Merrill Lynch.

Dr Ernest Kan, chief of operations, clients and markets at Deloitte Singapore, said: "Growing both the quality and quantity of companies listed on the Singapore bourse is another challenge that must be addressed. The most pressing need for Mr Loh would be to build a strong and market- driven team quickly."

But the honeymoon period will not last long as the market looks to Mr Loh to work a miracle and restore the SGX's fortunes.


A version of this article appeared in the print edition of The Straits Times on June 23, 2015, with the headline 'Can new chief revive fortunes of ailing SGX?'. Subscribe