By Goh Eng Yeow

10 November 2009, Pg B13  (c) 2009 Singapore Press Holdings Limited

Aussie study finds positive link between SGX-listed index futures and overseas markets

TRADING of stock index futures on the Singapore Exchange (SGX) has a beneficial impact on the underlying overseas markets they track, an Australian study released yesterday has found.

This flies in the face of the usual view that listing a stock index future contract outside its home market can cannibalise existing trade orders, the authors said.

Contracts on the futures of indices such as the SGX Nikkei 225 Index and the MSCI Taiwan Index are traded on the SGX.

The study by University of Sydney academics found that, in fact, both futures contracts and the component stocks traded - in these examples - in Taipei and Osaka, received a boost from the SGX offering.

'Our results show that there is a positive and statistically significant relationship between the turnover of the SGX-listed index futures and those of the domestic exchanges,' the study said.

This should encourage bourses to consider making plans that 'involve promoting of trading of cross-listed securities which are traded simultaneously to entice even more trading by global financial institutions', the study said.

The study had noted that when there was a rise in the turnover of SGX-listed index futures, this led to a corresponding jump in the trading of the domestic index futures and component stocks.

'These findings confirm the findings of prior studies that the additional listing of a financial product on a foreign market increases the trading volume of the home markets,' it added.

The study found 'the link in the turnover of the futures (in the home market) and the component stocks is due predominantly to arbitrage trading and hedging by market participants'.

As the index future contracts are traded on more than one stock exchange, there is also an expansion of the investors' base.

Giving his comments on the Australian study, SGX head of product management Thomas Tey said the exchange had always believed that provision of a one-stop, pan-Asian equities derivatives platform increased trading of these products.

'The SGX liquidity pool plays a part in boosting liquidity and efficiency of the underlying cash markets around the region to the benefit of all, as arbitrage opportunities stimulate further global interest in the home markets,' he said.