SGX Penny-Stock Rout Overshadows Derivative Gain: Southeast Asia

Singapore Exchange Ltd.’s profit probably fell last quarter as a penny-stock rout that curbed equity trading volume on Southeast Asia’s biggest bourse overshadowed an increase in derivative transactions.

Stock trading in Singapore dropped 20 percent to a daily average of S$990 million ($774 million) in the three months ended Dec. 31 from a year earlier, data compiled by Bloomberg show. SGX’s profit slid 6.9 percent to S$71 million in the quarter, based on the median of seven analyst estimates in a Bloomberg survey. The results are due after the close today.

The bourse’s first earnings decline in five quarters probably came as brokerages restricted investments in riskier small-cap stocks after a drop in shares of three commodity companies erased $6.9 billion in market value over three days in October. The benchmark Straits Times Index ended 2013 with the smallest gain among developed markets.

“Investors have been quite disappointed with the Singapore stock market’s performance,” Daphne Roth, Singapore-based head of Asian equity research at ABN Amro Private Banking, which oversees about $207 billion, said by phone. “That could weigh on Singapore Exchange’s stock trading revenue.”

SGX, led by Chief Executive Officer Magnus Bocker, has expanded its offering of derivatives that allow investors to trade stock futures from exchanges in Japan to India, as well as those for iron ore, rubber and coal. The bourse said this week it began clearing freight futures contracts.

Circuit Breakers

Shares of Blumont Group Ltd., Asiasons Capital Ltd. and LionGold Corp. tumbled at least 42 percent on Oct. 4, prompting the SGX to suspend the stocks. The central bank reviewed trading of those equities and said in a statement the selloff “surfaced broader issues regarding the market structure.”

UOB-Kay Hian Holdings, Singapore’s largest brokerage with about 800 brokers, had more than 50 stocks on its restricted trading list after the plunge, including Asiasons, Blumont and LionGold, a document obtained by Bloomberg showed.

SGX said today it will introduce circuit breakers on Feb. 24 for stocks priced at more than 50 Singapore cents and for those on the Straits Times Index and MSCI Singapore Index. A “cooling-off period” will be introduced for five minutes when shares move 10 percent in either direction.

“Stock trading volumes will be lagging for some time,” said Kelly Teoh, a strategist at brokerage IG Ltd. in Singapore. “That’s why SGX is introducing new derivatives products. It will take time before the derivatives business could fully offset waning equities trading volumes.”

Derivatives Focus

Exchanges worldwide have been seeking to build their futures and commodities businesses as contributions from equities decline. Hong Kong Exchanges & Clearing Ltd. bought the London Metal Exchange in December 2012. Japan Exchange Group Inc., formed from the merger of rivals in Tokyo and Osaka, has made expanding services in derivatives a key objective.

SGX shares rose 0.1 percent to S$7.03 as of 12:29 p.m. in Singapore trading. The stock added 3.6 percent last year, compared with Australia’s ASX Ltd., which climbed 20 percent. Japan Exchange more than tripled, while Hong Kong Exchanges lost 2 percent.

Bocker, 52, has been adding new revenue sources for SGX since assuming the post in December 2009. The bourse rolled out a S$250 million trading platform in August 2011 that can execute transactions in 90 microseconds and last year added Philippine and Thai index futures to its derivatives product offerings.

A total of 23.56 million futures contracts changed hands in the second fiscal quarter, a 16 percent increase from a year earlier, according to SGX data. Derivative trading accounted for 33 percent of total revenue in the three months ended Sept. 30, while the equities business contributed 67 percent, data compiled by Bloomberg show.

Fewer IPOs

Not all of SGX’s derivative products are attracting investors. The bourse said Jan. 16 it plans to stop trading and clearing futures on three industrial metals after the contracts attracted little interest from customers. SGX, which started trading the copper, zinc and aluminum futures in a joint venture with London Metal Exchange in February 2011, will make the products “dormant.”

The exchange also faces a dearth of initial public offerings in Singapore, Arjan Van Veen, an analyst at Credit Suisse Group AG in Hong Kong, said by e-mail.

The amount companies raised from IPOs in Singapore fell 24 percent to $643 million in the quarter, according to data compiled by Bloomberg. That compares with $4.25 billion in Australia, $1.87 billion in Japan and $642 million in Hong Kong, the data showed.

“We’ve not seen a lot of initial public offerings in Singapore for a while,” Van Veen said, adding that “trading fees for stocks have been very weak following all the negative newsflow on penny stocks.”

Before it's here, it's on the Bloomberg Terminal.