SGX Checks Derivatives Trading Glitch to Protect Cash Cow

Singapore Exchange Ltd., operator of Southeast Asia’s biggest bourse, said it’s reviewing procedures after derivatives trading was delayed by a computer breakdown last week, sending investors to alternate venues.

The three-hour delay, caused by a faulty system-monitoring process, sent investors to Osaka to buy and sell Japanese index contracts on April 9. The disruption in the bourse’s fastest-growing business, happened as the company plans to roll out new products amid record derivatives trading.

“We have taken preventive measures to make sure it doesn’t happen again,” Chief Financial Officer Chng Lay Chew said in an interview in Singapore April 17. “Improving market sentiment and rising volatility will continue to drive growth in the derivatives market.”

Disruptions in electronic markets have been under scrutiny since the May 2010 flash crash in the U.S. that briefly wiped $862 billion from stocks. Osaka’s derivatives platform malfunctioned in March, while in October orders for Indian stocks improperly entered by a Mumbai brokerage sent the S&P CNF Nifty Index down 16 percent in eight seconds before rebounding.

SGX, which reported earnings that beat analyst estimates this week, has risen 10 percent on the benchmark Straits Times Index this year, compared with a 4.1 percent gain in the index. The stock fell 0.8 percent to S$7.73 yesterday.

Futures Contracts

SGX, which now hosts greater trading volumes of Nikkei 225 futures than Japan, posted a 26 percent increase in third-quarter net income to S$97.7 million ($79 million), more than analysts expected, as equities and derivatives trading volumes jumped. Derivatives trading was at a record, led by demand for futures contracts on Japan’s Nikkei 225 Stock Average and the FTSE China A50 Index.

Average daily derivatives transactions jumped 52 percent to a record 479,235 contracts in the three-months ended March 31, SGX said on April 16. The Japanese index futures contracts are the most actively traded in Singapore, followed by those from China, Taiwan and India, the company said.

Revenue from derivatives trading climbed to 28 percent of the total from 26 percent, while contributions from equities slipped to 39 percent from 40 percent, exchange data showed.

“We have built a critical mass over the years, attracting the right members to participate in the derivatives market,” Chng said. “Singapore Exchange is in a AAA country. We have a very strong balance sheet and we meet the highest regulatory standards in the world.”

The bourse has about 43 derivatives trading members, compared with 27 equities brokers, the company said on March 6.

Osaka Shift

The volume of Nikkei 225 futures traded on the the Osaka Securities Exchange on April 9 exceeded those on Southeast Asian bourse for first time since Feb. 11 as the software malfunction prevented any derivatives trading in Singapore for three hours. Equity index and commodity futures can normally be traded Mondays through Fridays on SGX from 7:30 a.m. to 2 a.m. the following day.

“The only loser that day was SGX,” said Brandon Chia, a futures and options trader at Newedge Financial in Singapore, adding that his clients were able to trade via CME and Osaka. “It was surprising that it took them a couple of hours to get it fixed.”

Derivatives trading has benefited from the rally in Japanese equities in the past few months, Chng said. The Nikkei 225 is heading for a ninth straight month of advance, the longest such streak since January 2006, amid investor optimism Prime Minister Shinzo Abe and Bank of Japan Governor Haruhiko Kuroda will aggressively tackle deflation.

“We are very sorry that this happened,” Chng said.“We take it very seriously.”

Asian Gateway

Exchanges worldwide are seeking to build their futures and commodities businesses as contributions from equities trading decline. Hong Kong Exchanges & Clearing Ltd. bought the London Metal Exchange in December as the company posted its lowest quarterly profit since the global financial crisis. SGX, which started trading iron-ore futures this month, will introduce futures contracts on Philippine and Thai equity indexes by the fourth quarter.

The outage “isn’t a major source of embarrassment for the exchange,” Chia of Newedge Financial said. “These things happen so I doubt there is a major dent to SGX’s reputation.”

Singapore is adding more products to strengthen its position as an Asian gateway for international investors, Chng said. There’s a cost advantage for investors to trade different countries’ equity indexes and commodity futures from Singapore as it allows for cross-netting of collaterals that are required when trading futures, he said.

‘Slight Edge’

“SGX is pretty well positioned as an Asia Pacific hub for trading of equity indices,” Chia said. “Compared to other exchanges that pretty much trade their own domestic markets, SGX has a slight edge.”

To further develop the derivatives business, the Southeast Asian bourse said last month it will introduce foreign exchange futures in the second half of 2013, starting with four currency pairs including U.S. dollar-Singapore dollar, Indian rupee-U.S. dollar, Australian dollar-U.S. dollar and Australian dollar-Japanese yen.

HSBC Holdings Plc raised its rating for SGX to overweight from neutral and increased its share-price forecast to S$8.50 from S$7.20 following the results. Of the 20 brokerages covering SGX, seven recommend buying the stock, seven suggest selling it and the rest have hold ratings, according to data compiled by Bloomberg.

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