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SGX fights back against thin volumes

For Singapore's SGX exchange, this month's launch of a trading link between the Hong Kong and Shanghai equity markets has loomed large, as investors look ever more anxiously at the rise of China's capital markets.

But far from being unnerved, Magnus Bocker, SGX chief executive, believes the landmark link will actually help his business in the long run.

"It's important for all of us in the exchange world that it becomes a success because it shows the importance of connectivity - and that liquidity feeds liquidity," he says.

One ripple effect from the Shanghai-Hong Kong Stock Connect scheme has already been felt in Singapore: trading volume in SGX's FTSE China A50 index - the only index on Chinese shares available outside China - more than doubled in the quarter ahead of the trading link's launch.

Now, Mr Bocker is working on an Asian link of his own: in September, he began talks with the Taiwan stock exchange about connecting their two markets.

He says that, with both Singapore and Taiwan developing rapidly as offshore centres for the renminbi - China's currency - a link with Taiwan opens up "greater China" opportunities for investors.

This, he hopes, will help counteract a torrid year for the equity markets run by SGX. A penny stock scandal a year ago dented investor confidence, and Singapore's markets have suffered from anaemic volumes since. A three-hour trading outage this month, caused by a power failure, has not helped, either.

Singapore has also been hit by a spate of de-listings of sizeable mid-cap stocks, as companies have chosen to take their businesses private - including CapitaLand, southeast Asia's biggest property developer, which this summer delisted its shopping mall operating unit, CapitaMalls Asia.

Despite this, SGX remains the eighth largest exchange globally, as measured by the market capitalisation of its operating company as a listed entity - just behind Japan Exchange Group and ahead of ASX of Australia. However, it was overtaken by Thailand's stock exchange last year in terms of equity market trading volume.

In the fiscal first quarter that ended on September 31, revenue generated from equity market trading at SGX fell 29 per cent, as a result of a 27 per cent fall in average daily trading volume.

Mr Bocker has moved to address this decline by signing up a total of 21 banks and brokers to act as so-called liquidity providers and market makers, to encourage more trading. This system is similar to that used on the floor of the New York Stock Exchange for more than a century.

Liquidity providers receive a discount on the fees that SGX charges if they commit to trading a certain amount of shares in value terms, while market makers provide quotes at a narrow bid-offer spreads on designated stocks.

"Yes, volume is down, but the quality of the market - the spreads and depth of the market - has actually been enhanced following the introduction of these two programmes," Mr Bocker says. "And we are only four months in."

Average daily trading volume in the shares covered by these programmes - which include those of brewer ThaiBev - jumped 129 per cent in the period June 1-October 31, compared with a rise of 6 per cent for the overall market.

In addition, from January, SGX plans to cut the "board lot size" - the number of shares that investors must deal in - from 1,000 at present to 100, to make it easier for investors to buy highly priced blue-chips. Then, in March, it aims to introduce a "minimum trading price" of 20 cents, to discourage what SGX calls "excessive speculation" in low-priced penny stocks.

Mr Bocker also hopes to attract more international companies to the exchange with a new system, introduced earlier this month, that allows those listed on one of 22 bourses overseas - including London - to gain a secondary listing in Singapore more easily.

He can already take satisfaction from the strength of the exchange's derivatives business. It is closing in on equities trading as the largest source of income, accounting for 30 per cent of group revenues, against 33 per cent from equities. In 2011, derivatives accounted for only 21 per cent, while equities provided 44 per cent.

One reason is the success of certain futures contracts tied to China - such as iron ore swaps, which are widely used by Chinese traders, many based in Singapore - and of renminbi currency swaps, which were launched last month.

But all eyes will be on how SGX fares early next year when, for the first time, it faces competitors in its own back yard.

Intercontinental Exchange, owner of NYSE, plans to launch a new commodities exchange in March, while Germany's Deutsche Borse is building an Asian clearing house. Both will be based in Singapore.

Again, though, Mr Bocker prefers to view rival offerings as an indicator of growth. "I think that [them] coming to Singapore is very important for the success of SGX because it once again proves Singapore as an international financial centre." he says. "There is nothing that grows a business faster than more players being in it."

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