SINGAPORE Jan 22 Singapore Exchange Ltd
, set to report its weakest profit in more than a year
after a penny stock scandal hammered trading volumes, is placing
a big bet on an increasingly crowded derivatives market.
The demise of SGX mini metals contracts, and lower volumes
for its iron ore swaps since China launched a competing product,
could be a warning sign for its ambitions as major international
exchanges muscle into its home turf.
The exchange is set to report second-quarter net profit of
S$75.2 million ($58.94 million) on Wednesday, down 1.4 percent
from a year ago, according to a Reuters poll of eight analysts.
Since taking over as CEO four years ago, Magnus Bocker has
spearheaded the launch of new financial and commodity
derivatives to make Singapore a regional gateway in Asia.
To diversify from cash equities, SGX has been putting an
increasing focus on contracts that track Asian stock indices
including the Nikkei 225 and China's FTSE A50.
"They have done a decent job. They have focused on an area
they have little bit more control over," said CLSA analyst
Marcus Liu, referring to SGX's introduction of derivatives
Iron ore accounted for 90 percent of all commodities
derivatives cleared by the exchange in 2013. The success of the
contracts - volumes more than doubled last year - helped propel
its total derivatives segment to 28 percent of the firm's total
revenue in financial year 2013, from 21 percent in 2010.
It also shows the potential of a steel contract SGX plans to
But it also shows the dangers. From a high of 23.3 million
tonnes in July, volumes fell to around 18 million tonnes a month
in October to December after the Dalian Commodity Exchange
launched a China-based iron ore futures contact.
There are already liquid steel futures on the Shanghai
Futures Exchange. While these and iron ore are not easily
accessible to those outside the country, creating an opportunity
for a player like SGX, China is looking to open up its markets.
SGX is trying to carve out a niche for itself in commodities
that do not put it in direct competition with established
contracts, but that could become increasingly difficult as other
exchanges look to a region that is providing the bulk of growth
in physical commodities trade.
Atlanta-based Intercontinental Exchange Group, which
runs the Brent oil futures benchmark, is buying the Singapore
Mercantile Exchange, while top U.S. futures market operator CME
Group is looking at its upcoming European exchange as a
proxy for an Asian exchange.
The Hong Kong and Exchanges Clearing Ltd bought
the London Metal Exchange in 2012 to expand beyond equities, and
scored its first victory when SGX last week canned a competing
LME mini metals contract that had failed to attract much volume.
A unit of Deutsche Boerse said last week it
bought a 52 percent stake in Cleartrade Exchange, the
Singapore-based commodity derivatives bourse.
"What we're offering is the ability to take away concerns
about fungibility and clearing and to make you able to trade
with anyone in the world," Michael Syn, head of derivatives at
SGX, said in November.
SLOWING SHARE TRADING
A penny stock scandal in Singapore that saw three stocks
crash spectacularly, after huge run-ups had turned them briefly
into billion-dollar firms, has knocked average daily turnover in
the three months to December to its lowest in five years.
The average equities turnover at Southeast Asia's largest
bourse fell to S$1 billion a day in the three months to
December, while turnover velocity, a key gauge of market
activity, fell to 35 percent to the lowest since SGX started
reporting the data in 2009.
The bourse is struggling to boost trading volume and attract
high-profile listings, while Hong Kong is poised to win a slew
of big-money IPOs this year.
SGX has also been hampered by a lack of depth in equity
markets across Southeast Asia, with large companies not keen to
list beyond their home markets.
"I would have to see a big uptick in sentiment before I
change my view on it," said Liu who has an "underperform" rating
"Despite a greater proportion of revenue from the
derivatives side, I still think that the overall driver for the
company is still the equities side."