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:
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.
perhaps SGX should appoint a few more market makers to make it alive in order to make the product to be successful… if not, I don’t think the investors or punters would show any interest in the product.
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Other than Market makers, ultimately will need people to trade these products.
Currently, differences in the way different brokerages set it up for trading can be confusing.
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