SGX stuck in a rut?

Jonathan Kwok
Straits Times, Singapore
8 November 2011

Critics have been grumbling that Singapore's share market is stagnating and that volume growth has been slowing down. Are their complaints justified, and have the Singapore Exchange's strategies been effective? Jonathan Kwok investigates.

THE pickup in trading volumes on the local market last month provided some cheer to remisiers and shareholders of the Singapore Exchange (SGX).

Last Wednesday, the local bourse operator said average daily trading turnover last month was $1.38 billion, up a touch from September's $1.36 billion.

But there are still vocal critics that argue that the local bourse is stagnating. Among them are some remisiers, whose rice bowls depend on executing trades for small-time investors and getting a cut of the commission.

'These past few months were slightly better, but during July this year my income was one of the lowest ever,' said one UOB Kay Hian remisier who has been in the business for 17 years.

'There was one month in 2008, during the crisis period, when my income was even lower, but that's about it. I can't think of any lower month,' added the remisier, who declined to be named.

The recent market volatility has been a mixed bag in terms of volumes. While volumes peaked in August at the outset of the latest market turmoil, they have slowed since then as investors slid to the sidelines due to battered sentiment.

'Volumes suffer in a protracted recession when market interest peters out,' observed CIMB recently, while DBS Vickers noted that 'trading volumes and value are subdued before clear signs of recovery are visible'.

The larger, structural problem lies in the longer- term trend, however, as the growth of trading volumes has not been as fast as in some other markets. Hong Kong, often regarded as Singapore's closest direct competitor as a financial centre, has seen its volumes spike much more in the past several years.

In 2003, as the region battled the Sars crisis, Singapore's average daily turnover was $593 million, and this average has grown to $1.56 billion so far this year, less than three times the 2003 figure.

In Hong Kong, some HK$10.3 billion (S$1.7 billion) of shares changed hands daily in 2003, and this has increased to HK$72.8 billion - about seven times the 2003 figure.

The total market capitalisation of firms with primary listings in Singapore is about US$550 billion (S$700 billion) now, some 240 per cent of the value at end 2003. Hong Kong's market capitalisation, at US$2.47 trillion, is about 350 per cent of the value at end 2003.

Hong Kong's trump card - China
'THE quick side of the story is that Hong Kong has China as its hinterland,' said Professor Joseph Cherian, director of the Centre for Asset Management Research and Investments at the National University of Singapore Business School. A lot of the large Chinese firms, such as the state-owned enterprises, have listed in Hong Kong, he added.

The SGX has also tried to attract China firms. This strategy met with initial success, with interest in these S-chips peaking in 2006 and 2007. But the 2008 financial crisis unveiled shocking corporate governance failures in some of these firms, scaring off investors.

'It's the blatantness of the S-chip frauds that has grabbed the headlines. They fell out of favour so quickly,' said former 'IPO king' Peter Choo Chee Kong, who has organised the listing of many S-chips.

Now, there are no China- based companies on Singapore's benchmark Straits Times Index. The largest Schips, Yangzijiang Shipbuilding, Cosco and Yanlord Land, have market values of between $2 billion and $4 billion.

By contrast, Hong Kong's Hang Seng Index boasts many China companies, ranging from banks to telecom
and energy players, with many of them being state-owned enterprises. Their market values can exceed HK$2
trillion, as in the case of energy giant PetroChina.

Hong Kong is also considered a deeper, more liquid market than Singapore. 'Hong Kong has institutions and banks, and large securities companies, which Singapore has as well,' said Prof Cherian. 'It's the mainland Chinese retail investors playing the Hong Kong market that make the difference.‘

Mr Choo said 'there's just a buzz in Hong Kong'. 'When you board a taxi there, the radio will be on and on the channel, the retail players will be calling in and asking about stock issues.‘ He said: 'This cannot be heard in Singapore, maybe the experts here are more concerned about whether they are breaking any laws in promoting a stock.‘

The UOB Kay Hian remisier noted that since the day he joined the business, the percentage of Singaporeans buying shares has been lower than the corresponding ratio for Hong Kong.

SGX efforts: Hits and misses
THE SGX's efforts to boost its business in recent years has met with mixed results, say observers.
One of its larger successes has been the growth of institutional and proprietary trading - where institutions like banks use their own money to take bets in the market.

The exchange does not classify its volumes according to whether they come from large players or retail
clients.

But observers say the large punters have been making up for much of the volume growth in recent years - at least from 2008 onwards.

The proportion of traded contracts worth more than $1.5 million was 35 per cent in December 2008. Last
month, it had grown to 42 per cent, indicating that large players are making up a greater share of the
market.

Based on patterns such as the growth of market data and membership fees, Phillip Securities analyst
Magdalene Choong argues that institutional and proprietary trading have been driving SGX volumes since last year at least.

'These past two years, a lot more financial firms - wealth management companies, hedge funds - have been
setting up as well, and they could have been driving up the SGX volumes,' she said.

To aid the growth of proprietary trading, the SGX - which already had a very fast trading platform - upgraded its system to be the world's fastest. The platform was launched in August and it is still too early to judge its success.

There is a chicken and egg question regarding the lack of retail participation. Did the SGX step in to attract large players when it could see that its market was not growing much, or is retail participation petering out because they feel they cannot compete against the large players and their high-speed computer programmes?

Observers say the jury is still out on this issue, though there have been complaints from retail players over ultra-quick trading giving the big players an advantage.

Other successes of the SGX include attracting foreign firms to list here, with 40 per cent of the market being made up of overseas listings.

In this respect it has led Hong Kong, which only early last year allowed listings by foreign companies.

But there have been misses and failures in the SGX's strategy as well. A proposed merger with Australia's ASX - which would have boosted liquidity and listings - fell through earlier this year due to political opposition Down Under.

The much-heralded introduction of the American depositary receipts of Chinese firms in October last year has not garnered much trading interest. And the scrapping of the 90-minute lunch break to extend trading hours, implemented in August, has not yet significantly lifted daily volumes.

But Ms Choong considers that the SGX is getting more hits than misses with its strategies. 'It is maintaining its strength while seeking new revenues elsewhere. Even when the market crashes, there is still income from sources like market data fees.' The SGX is also focusing more on other income sources to add on to its securities income, including commodities, index products and retail bonds.

Tough road for remisiers
THE SGX said in November 2009 that it wanted to add another 1,000 remisiers to the nearly 3,000-strong profession at that time. It has already achieved this, with the exchange saying there are now about 4,400 remisiers.

But some existing and past remisiers say it is not all good for them. 'Last time, we didn't need one billion shares for total market trades, and we already got good income. Now, even with one billion, trading is still quiet for most of the remisiers. A lot of this is us doing our own trades, and proprietary traders,' said the UOB Kay Hian broker.

He added that commission rates dropped in 2000, and have fallen further with the advent of online trading, as more investors do their trades online. 'A lot of us old-timers can't leave, we have been here too long...

But more of the new entrants leave after a while.‘ One former remisier told The Straits Times that he found it tough, with his client base 'not good enough', and that it is hard to find new clients. The ex-remisier, who declined to be named, quit the profession in May, having joined in July 2009. He is now a full-time proprietary trader.