SGX looks to leverage prediction signals amid equity derivatives expansion

Global derivatives markets, including Singapore Exchange (SGX), have hit record trading volumes in recent months as geopolitics becomes synonymous with geoeconomics. SGX reported a 40% year-on-year increase to a record trading volume of 38.3 million contracts in March, compared to 27.4 million lots the same time last year.

"The intrusion of politics into economics and the financial system is changing how asset managers approach strategic and tactical asset allocation," Janice Kan, managing director, head, derivatives at SGX said in an interview.

"For SGX, this is evident in the strong demand for our equity derivatives suite, where hyper liquid screen-traded futures are actively used to express macro views, hedge and rebalance portfolios."

While traders may have traditionally used SGX's Taiwan futures to hedge cash portfolios, they have increasingly been using the contracts as a proxy to trade the price action of specific stocks such as TSMC.

Enabling the T+1 session of SGX FTSE Taiwan futures to start at 2pm coincides with the timing of TSMC’s earnings announcements.

"That gives SGX an advantage as the only market open, allowing real-time order book and price formation when TSMC results are released," said Kan.

From a product innovation perspective, SGX is exploring prediction markets, particularly in categories representing real world economic outcomes where the exchange can add value.

"The information embedded in the pricing of probability-based event contracts will provide valuable market signals," said Kan.

"For instance, event contracts on shipping related indicators will offer users the ability to hedge risks in areas such as freight safety, supply chain disruptions and potentially uninsurable risks," explained Kan.

Trading data from those markets can capture a more real-time and higher frequency data points for users.

"Close collaboration with market participants and regulators will be key as the exchange considers future product innovation," said Kan.

Looking ahead, Vietnam's imminent upgrade to emerging market status by FTSE Russell from September is set to catalyse investor flows, creating upside potential for SGX related products such as the FTSE Vietnam 30 futures contract.

"As one of Southeast Asia’s fastest growing economies and a beneficiary of supply-chain under the China+1 strategy, the country is becoming increasingly attractive to global investors," said Kan.

Smaller notional sized contracts have been increasingly popular, as exemplified by the volume growth in SGX Micro FTSE Taiwan futures.

"For institutional investors, the need for precision hedging remains a high priority," said Kan. "Having a range of small and large sized contracts is key to managing total portfolio risks."

SGX has added to its growing rates franchise, with a series of APAC government bond futures in April.

The Asian exchange has added the US-based electronic brokerage firm as a trading and clearing member of its derivatives market, to strengthen international participation and market liquidity.