One way of trading the Singapore market is through the use of futures, which allows you to take either a long or short position in a cost efficient manner.

On the SGX derivatives board, there is both the STI futures and MSCI Singapore futures (SiMSCI). Options on the SiMSCI are also available.

Each point of the STI futures is equivalent to $10, so one contract size of STI futures at 3200 points is worth $32,000. The STI futures is hardly traded and suffers from a wider spread and poor liquidity.

The SiMSCI, on the other hand, is the instrument that is more widely traded. For example, the SiMSCI (Aug 2010) had 228,287 contracts traded in Aug 2010 while the corresponding STI futures only had 6 contracts traded over the same period of time.

The MSCI Singapore Index has a basket of 30 stocks and tracks the Straits Times index (STI) very closely. In fact, the MSCI Singapore Index has a 99.9% correlation with the STI over a period of two years, and a 99.6% correlation over five years.

The current value for the SiMSCI November 2010 contract is about 377. Each point of the contract is equivalent to $200, so one contract size of SiMSCI at 377 is worth $75,400.

To get an idea of how cost efficient futures are, we can take a look at the broker commission charges. The charges for the STI futures is S$10/contract while that for the SiMSCI is S$12/contract.

If you trade $76,000 worth of shares, brokerage at 0.25% will come up to about $190. Compare that to S$12 for the SiMSCI.

One note of caution though.

Futures can be highly leveraged. To open one contract of SiMSCI, you require a margin of less than $3000. Trying to buy SiMSCI with a capital of just $3000 would of course be suicidal in the long run. You will need a much higher capital base than $3000 to trade the SiMSCI.

Trading on leverage comes with high risks. Tight risk management and money management rules will need to be adhered to.

Extended Settlement Contracts, or ES for short, started trading on SGX today. You might have read a couple of news articles on ES.

So, what exactly are Extended Settlement Contracts?

It is a futures contract that allow you to buy or sell shares of a particular company today but which will be settled at a future date.

It is every contra trader’s dream as it allows settlement of trades to be done up to one month later. This means a trader would have a longer time to hold his position. Compare this to a normal buy transaction which has to be settled in 3 days and a sell transaction which has to be covered within the same day.

Furthermore, as only a small percentage of the contract (called the margin) has to be paid upfront, leverage can be employed to magnify returns. This is a double-edge sword as losses can also be magnified.

The first trading day of each ES contract will be 25th of the month preceding the contract month. The last trading day will be the last Friday of the contract month. Settlement will be on the 3rd market day after the last trading day.

I won’t go into too much details about the technical aspects of ES contracts. You can read more about this on the ES faq and product guide:

ES FAQ

ES Product Guide

My comments on this product:

If the ES market is liquid enough, it may offer exciting arbitrage or hedging opportunities for the savvy investor. The ability to employ leverage and go long or short on a share without paying any financing cost is a plus point over CFDs. On the contrary, punters (who generally lose money) are given another tool which can be dangerous to their pockets.

Note that different brokerage houses are implementing trading of ES differently. Some can be done electonically but some require a broker to transact for you. Some require opening of sub-accounts with trades that won’t be settled into the CDP, while some allow trades to be settled direct into your CDP. This is going to make it more confusing for the layman.

SGX has clearly launched this product to attract more traders back into the market. From T+3 to T+30 is a great world of difference! Unfortunately, if the volume and liquidity of the ES market today is anything to go by, this product might turn out to be a dud. Liquidity is very poor with wider spreads than the mother shares. For example:

SIA.ES.0903, Semb Corp.ES.0903, SMRT.ES.0903, SPH.ES.0903 and StarHub.ES.0903 – No trades done for today

SembMar.ES.0903 – 10 lots done
SGX.ES.0903 – 23 lots done
SingTel.ES.0903 - 2 lots done
ST Engg.ES.0903 – 6 lots done

SGX will have to find a way to make it simpler for investors and also attract more institutional demand for this product to make it a success.