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Interesting Market Statistics - Market Crash and Power Shift

Hi my readers, it has really been a super long time since I last blogged. All this while, I have been thinking what I should be blogging? For the past few months, I have been learning about option trading and practicing on the virtual account on the Think or Swim (TOS) platform. The more I learnt about option trading, the more I find it more flexible than warrants and stocks trading in term of risk management, cost efficiency and how quickly I can morph my losing trade to a winning trade or at least minimize my loss. I have thought of sharing about option trading on my blog here but I realized there have been a lot of other blogs blogging about option trading. In fact, I find the option university blog one of the best blogs I read so far. It is really a good place to start learning about option fundamental and its application in the market.

The market has been going down since last October 2008 except for the period during Christmas where we see the Christmas rally. However, since the beginning of this year, the market is about 6.5% down from the close of January 01, 2009. If the January barometer is anything to go by, it looks like 2009 is going to be worse than 2008.

On top of that, there is something which I would like to share with my readers. This is something that Conrad had shared with us. 40 years ago in 1969, a year after the 1968 election year that saw a power shift, the market crashed. Yet another 40 years before that, back in 1929, a year after the 1928 election year, we also have a power shift and the market also crashed, it is likely that history will repeat itself in 2009, a year after a power shifting election year and 40 years after. Isn’t it interesting to see how numbers and statistics play out in the market?

The global recession and meltdown in world markets has more than halved the STI from 3,800 (its high) to 1,880 over 2008. The 50% decline in the STI was the largest annual fall in its 42-year history. From October 2007 through November 2008, the S&P 500 declined 52%, making it the third- worst bear market since the 1929crash. What is most amazing is the speed at which the markets declined. In history, it generally takes 2 years for the market to decline by 40%-50%. This time, it took only ONE YEAR. Reasons being the de-leveraging of hedge funds that were super highly geared and also because computerized trading and the speed at which information travels.

It is the general consensus that continued problems in the credit markets and the ongoing recession, means that 2009 will likely be even a worse year for the economy than 2008 as effects of the financial crisis spreads to the rest of the economy. The economy is expected to continue to contract, residential construction and prices should continue to decline, and the unemployment rate is continued to rise.The good news is that there will be a huge stimulus package which could total as much as $500 billion or even more. This in addition to the slashing of interest rates should turn the economy around by end 2009 to early 2010 (cross my finger). However, seeing that the stock market precedes the economy, stocks should start to recover before then (cross my finger again).

Actual Operation of Warrant Trading (Part 6)

This is the last post of the Actual Operation of Warrant Trading. In our last post, we will talk about the last trading day, expiry date and payout date.

If an investor waits until the maturity to ask the broker to sell his warrant holdings on hand, the instruction may be rejected. It is because that the last trading day has passed!

If it is only at the last minute that you find out the last trading day is before the expiry date, you might have lost the last chance for selling. Under the requirements of the Singapore stock exchange, the last trading day of a warrant must be the fourth trading day (excluding any Saturday, Sunday or public holiday) before its expiry date. In fact, investors may work that out for themselves with reference to the expiry date disclosed by the issuer.

Let us look at the example of SPCSGAECW081013. From the code, the expiry date is on the 13th October 2008 and the last day of trading will be on 7th October 2008 that is fourth trading day before expiry. Based on these terms, the trading came to an end after 7th October 2008.

When a warrant has expired, the issuer will transfer the settlement amount to the securities settlement account of the investor through the Central Depository (CDP). Generally, the payout date is around three working days afterwards when the money is transferred to the CDP (depending on the specific arrangements of the issuer concerned). The money will then be redirected to the investor by his or her broker or bank.

There will always be 5 valuation dates. In other words, the closing price of a valuation date may be used twice should there be a Market Disruption Event (MDE) on the previous valuation date. The Macquarie Warrant Hotshot competition begins today at 0900H, all the best for those who have sign up for the game.

Actual Operation of Warrant Trading (Part 5)

With the Macquarie Warrant Hotshot Competition starting tomorrow, it is time for me to post the last two posts on Actual Operation of Warrant Trading. In this post, we will focus on the calculation of settlement price.

The method of calculation of settlement price differs for stock warrants, index warrants and other types of warrants. In general, it is not as complicated as one might think. We will discuss only the calculation method for standard warrants. We will not be touching on the settlement for exotic warrants.

Stock Warrant

The settlement level of a stock warrant is the average closing price of its underlying for the five trading days immediately preceding the expiry date. This is true across most of the warrant issuers that I have studied. Take for example, the call warrant OCBCSGAECW080707 which is issued by Société Générale (SGA) on the underlying OCBC counter which expires on 7th July 2008 with a strike of S$8.00. The conversion ratio on this warrant is 1:3 which means we need three warrants to convert into a single OCBC stock.

The settlement calculation is computed as follow,

For call: Max { [(Settlement Price – Strike Price) ÷ Conversion Ratio ] ÷ Exchange Rate., 0 }

For put: Max { [(Strike Price - Settlement Price) ÷ Conversion Ratio ] ÷ Exchange Rate., 0 }

Based on the above formula, we need to know how to compute the settlement price so we can do the computation for the settlement at expiry.

From the screen capture above, the last five trading days prior the expiry date of the call warrant on 7th July 2008 are 30th June, 1st July, 2nd July, 3rd July and 4th July. Notice 5th and 6th July are weekends and are not consider part of trading days. The settlement price is calculated as follow, based on the closing price at the end of each trading day.

(S$8.17 + S$8.07 + S$8.15 + S$8.08 + S$8.05) ÷ 5 = S$8.104

This is above the strike of S$8.00 which is ITM and hence the settlement calculation is

Max { [(S$8.104 - S$8.00) ÷ 3] ÷ S$1.00, 0 } = S$0.034667 per warrant.

Hence if you have bought 10 lots of OCBCSGAECW080707, you will have receive a payment of S$0.034667 X 10 X 1000 = S$346.67.

Let’s take a look at the call warrant SPCSGAECW080707 on the underlying SPC counter which expires on 7th July 2008 too with a strike of S$7.88. The conversion ratio on this warrant is 1:5 which means we need five warrants to convert into a single SPC stock.

The screen capture above showed the last five trading days prior the expiry date of the call warrant. Again, the settlement price is calculated as follow, based on the closing price at the end of each trading day.

(S$6.60 + S$6.72 + S$6.83 + S$6.95 + S$6.91) ÷ 5 = S$6.802

Notice this is below the strike of S$7.88 which is OTM and hence the settlement calculation is

Max { [(S$6.802 - S$7.88) ÷ 5] ÷ S$1.00, 0 } = S$0.00 per warrant.

Hence if you bought 10 lots of SPCSGAECW080707, you will not receive anything in return.
Option trader might find the settlement of warrant is quite different from that of the option. The different being the settlement price is taken from the average of the last five trading days of the underlying rather than the last closing price of the underlying one day prior to the expiry of option.

The rationale behind such approach is to prevent anyone who has enough capital to move the stock price of the counter through market manipulation such that the warrant will become ITM at expiry. Take for example in the case of the SPC call warrant above. Suppose the strike of this warrant is S$7.00 instead of S$7.88 and if the settlement calculation is computed based on the last closing price on the trading day prior to the expiry of the warrant. If a person or an institutional investor has enough capital to buy into the SPC stock at near the closing bell of the day to push up the price of the SPC counter to be above S$7.00, say S$7.10, then for each warrant the investor holds, he or she will receive S$0.02 per warrant at settlement.

Of course this is a hypothetical situation but it is not possible in real life. Having the average of the last five trading days’ closing price as settlement price is to prevent such market manipulation from happening cause it is more difficult to move the stock price for five consecutive days than in a single time frame at closing bell. However, if the investor does have the capability to move the stock price for five consecutive days, the Singapore Exchange may already halt the trading of the underlying before further manipulation happens.

Index Warrant

The settlement level of an index warrant differs across different issuers. I have listed the method of settlement for the Straits Time Index (STI) for various issuers below based on my findings.

1. For Société Générale (SGA), the settlement for the STI is based on the final settlement of the future contract of the STI. The future contract settlement for STI can be found here.
2. For Deutsche Bank (DB), the settlement for the STI is based an amount equal to the reference level on the valuation date or an amount equal to the arithmetic average of the reference levels on all the valuation dates, as determined by the issuer and without regard to any subsequently published correction.
3. For BNP Paribas (BNP), the settlement for the STI is based on the five days average closing price of STI.
4. For Macquarie Capital Securities (MBL), there is no warrant issued for STI that I can find.
5. For Rabo Bank (RB), I cannot find any settlement details on how they compute for both equities and index.

The formulae used to compute the settlement calculation for index is the same as the ones used to calculate for stock. For example, the settlement for put warrant STI3200SGAEPW080627 on the underlying STI which expires on 27th June 2008 with a strike of 3200 and conversion ratio of 500 is as follow,

Max { [(3200 – 2947.8) ÷ 500] ÷ S$1.00, 0 } = S$0.504400 per warrant.

The settlement level 2947.8 is gotten from the Singapore exchange website. See the screen capture below.

Please do take note that the settlement for HSI index listed in Singapore exchange by various issuers may have a different settlement procedure compared with STI. I have listed the links below where you can find the calculation of the settlement for all the expired warrants by different issuers.

1. For Société Générale (SGA), the settlement details can be found here.
2. For Deutsche Bank (DB), the settlement details can be found here.
3. For BNP Paribas (BNP), the settlement details can be found here.
4. For Macquarie Capital Securities (MBL), the settlement details can be found here.
5. For Rabo Bank (RB), I cannot find any settlement details on how they compute for both equities and index.

I hope this post has given my readers an idea on the settlement for both Singapore equities and Index. The same formula can be used to compute for plain vanilla warrants issued on equities or index in Hong Kong or Japan. We just need to pluck in the exchange rate in this case and also find out on how the settlement level is determined.

Exploring the Precursor to Straight Through

I miss out the portion on Straight Through Processing (STP) earlier on and take the opportunity now to post it here, thanks to Shashank Mahajan who reminder me. I seriously didn’t expect someone from New York to be reading my blog. Thanks for your support.

To understand STP, you need to understand the concepts of the front office, middle office, and back office. These are, role-wise, the segregation in a member’s office or trading institution’s office.

The front office is responsible for trading. In a broker’s office, the front office speaks to various customers and solicits business. The front-office staff is also responsible for managing orders and executing them.

The back-office staff is responsible for settling transactions. The back office ensures that all obligations toward the clearing corporation are met seamlessly and that the member receives its share during pay-out.

While this entire process is happening, the middle office monitors all limits and exposures, and thus risks that the firm is assuming. The middle office is also responsible for reporting, especially where corporate-level reporting is required.

Since a broker’s office is organized into front, middle, and back offices, solution providers structure their products in the same fashion in the form of modules. Although many vendors provide solutions for all three sections, it is not mandatory for a broker to buy all three modules from the same vendor. If a broker goes for different vendors, though, then they have an issue of inter-module communication. Most brokers want all the three modules to be integrated. If they are not, then data will have to be entered multiple times in these modules. To obviate from this problem, brokers rely on a concept called STP.

STP, as defined by the Securities Industry Association (SIA), is “...the process of seamlessly passing financial information to all parties involved in the transaction process, spanning the investment manager decision through to reconciliation and statement production, without manual handling or redundant processing in real time.”

Two types of STP exist: internal and external. In the case just discussed, internal STP is required because you need to connect modules installed in a broker’s office. But some other entities such as custodians, fund managers, and so on, play an equally important role in settlement. To achieve true STP, even these need to be connected to each other. Any attempt to connect such entities beyond the organization in pursuit of STP is called external STP.

The industry wants to put processes in place that will allow an order to flow right from deal entry to conversion to trade to affirmation and confirmation and finally through settlement and accounting without manual intervention. This is because the industry wants to move toward T+1 settlement. This means trades done on one day will get settled the next day. This is an ambitious plan because it will call for a lot of process change, technology change, and industry change. Applications will have to come together and orchestrate the entire business process.

STP provides a lot of benefits to industry participants:

• STP reduces settlement time. This essentially reduces risk because transactions will be settled faster and will be irrevocable. Settlements are said to be irrevocable when they are considered to be final and cannot be reversed. Reduced settlement time also means better utilization of capital.
• Less manual intervention will mean fewer operational risks and errors. It will also mean fewer costs.
• STP will force the entire industry to move toward standard communication protocols. This will mean standardized systems and fewer system development and maintenance costs. Interoperability will be a prerequisite for this to happen.
• Increased automation will lead to increased throughput in transaction processing, thereby enabling institutions to achieve greater transaction volumes.

Equity trading and STP by itself are vast subjects, and understanding every minute business detail in a single go is not possible; furthermore, the functioning of every stock exchange is different from one another (though the concepts are fairly standard).

Macquarie Warrant Hotshot Competition

For those who have been trading options, you will realize that there are a lot of virtual trading platforms out there for you to practice your strategies and polish up your skills. Unfortunately, this is not so true for warrant trader. I do my own virtual trade on a spreadsheet I created but then it lacks the real time data feed.

Macquarie is organizing the second Warrant Hotshot competition which is a real-time simulated trading contest designed to improve your knowledge of warrant investing without risking any capital. In fact, you could stand to win the S$20,000 Grand Prize if you are crowned Singapore's Warrant Hotshot.

The Hotshot contest is suitable for investors of all skill levels from newcomers to experienced warrant traders. Participants will begin the contest with S$100K Hotshot dollars and prizes will be awarded to those who are able to generate the largest profits by trading Macquarie warrants in the simulated trading environment. Warrant prices in the contest will mirror the real warrant prices on the SGX.The competition will be segmented into four main categories: dealers, investors, media and students, with participants from each category competing against each other for the weekly and group prizes. There will also be a grand prize winner for the investor with the largest portfolio at the end of the competition.The contest is scheduled to start on 14 July 2008 and will run for a period of 8 weeks. Please click here to register.

You can register under the appropriate category. For convenient sake, I have re-posted the Rules and Regulations here for your reference.

Introduction

Macquarie is pleased to present the second Macquarie Warrant Hotshot contest to investors. The contest is designed to give new and existing warrant investors the opportunity to experience trading warrants in a real-time simulated environment. Live pricing for both warrants and their respective underlying will mirror those seen on the SGX main board.

Eligibility

• Participants must be aged 21 years or above at the time of registration.
• All staff and their immediate family members of Macquarie Capital Securities (Singapore) Pte. Limited (Registration Number 198702912C) and Macquarie Capital (Singapore) Pte. Limited (Registration Number: 199704430K) and their related body corporate are not eligible to receive any prizes in this Macquarie Warrant Hotshot contest.
• Participants can be of any nationality.
• Participants must be residing in Singapore.
• To be eligible for any prize, the following conditions must be met:
1. The Participant must have complied with the rules and regulations stated.
2. The Participant must have completed at least one (1) buy trade (using the virtual cash in the Hotshot Account) during the term of the contest.
3. The Participant must not have been disqualified from the contest.

Registration

• Participants can sign up for only one Hotshot Account. Participants must register their own personal particulars, and not use another person's particulars to register for the contest. Participants must not trade using another participant's Hotshot Account.
• Participants must register using their names as stated in their NRIC or Passports. NRIC or Passport numbers registered must be valid and accurate to be eligible to win a prize. Participants who fail to produce a valid form of identification will not be awarded cash prizes should they be declared winners for the respective prizes. Driver licenses will not be acceptable.
• Participants must register in their appropriate category i.e. Remisiers and Dealers, Private Investors, Media and Students. Any participant competing in the Remisiers and Dealers, Media or Student categories will be asked for proof of their employment within these industries (or proof of study for the student category) before any prizes are awarded. A letter from their respective companies and institutes of learning, along with their NRIC or passport may be required for verification. Participants working in any publishing, or broadcasting company qualify as Media participants. Participants who have doubts as to whether they qualify for a particular category may contact the warrants team at 1800 288 880. Any participant competing in the wrong category will not be eligible for any prizes.
• Participants must agree to be bound by the Rules & Regulations set by Macquarie Capital Securities (Singapore) Pte. Limited.
• Macquarie Capital Securities (Singapore) Pte. Limited reserves the right to change the Rules & Regulations of the contest, and will disqualify any participants breaching the rules stated herewith.
• Macquarie Capital Securities (Singapore) Pte. Limited also reserves the right to disqualify any participants attempting to tamper the trading system or influence the warrant prices by manipulating the underlying prices. Any breach of market misconduct will be reported to the SGX and / or the Monetary Authority of Singapore.
  Participants can sign up for the contest anytime from 30 June 2008 9am by completing the registration form online at http://www.warrants.com.sg/.
• In case of any dispute, Macquarie Capital Securities (Singapore) Pte. Limited will have the final discretion in the award of any prizes.

Contest & Prize Details

• The contest will last for 8 weeks, starting at 9:00 am on 14 July 2008 and ending at 4:59 pm on 5 September 2008.
• Each participant will start the contest with an initial credit of 100,000 points, with every one point being the hypothetical equivalent of one Singapore dollar.
• There is a "reset" option (My Portfolio -> Personal Portfolio), where players can start over with a credit of 100,000 points, and have their previous trades deleted. They will not be eligible for the Weekly Hotshot Prize for that particular week. However, they will still be eligible for the Grand Hotshot Prize as well as the Category Hotshot Prize.
• There will be 4 categories: 1) Remisiers and Dealers 2) Private investors 3) Media 4) Students. Participants can track the names of the top 5 Hotshots in each category on the contest website.
• There will be four winners for the Weekly Hotshot Prize each week. The weekly winners will be the participants in each of the four categories with the highest percentage gain in his or her portfolio that week. The percentage gain in the portfolio is measured from the close of market on Friday that week, and comparing it to the Friday before. E.g. For the week starting 21 July 2008 and ending 25 July 2008, the percentage gains for that week will be calculated as:
  

  (P25 - P18)/ P18 x 100%
  

  where P25 is the total credits of the portfolio at the close of 25 July 2008 and P18 is the total credits of the portfolio at the close of 18 July 2008.

• For warrants over Singapore stocks, the market value of a participant's holdings will be calculated based on the warrant bid price at 4:59 pm.
• For warrants over Hong Kong stocks, the market value of a participant's holdings will be calculated based on the warrant bid price at 3:59 pm. For warrants over Hang Seng Index ("HSI"), the market value of a participant's holdings will be calculated based on the warrant bid price at 4:28 pm.
• After 8 weeks, there will also be one Category Hotshot Prize winner in each category. This will be the participant with the largest portfolio value in terms of credits from each category, regardless of when the participant joined the contest.
• After 8 weeks, there will be one Grand Hotshot Prize. This will be the participant with the largest portfolio value in terms of credits, regardless of when the participant joined the contest. Do note that the winner of the Grand Hotshot Prize will also be the winner of his or her Category Hotshot Prize, and could potentially be the winner of the Weekly Prize for the last week. However, only the cash value of the Grand Hotshot Prize will be awarded.
• The cash value for each of the prizes is stated below:
1. Grand Hotshot Prize: S$20,000 for the grand winner.
2. Category Hotshot Prize: S$3,000 per winner (total 3 winners)
3. Weekly Hotshot Prize: S$200 per winner each week (total 32 winners)
• Participants are allowed to win weekly prizes more than once.
• To be eligible for any prize, the following conditions must be met:
1. The Participant must have complied with the Rules & Regulations stated herewith
2. The Participant must have completed at least one buy trade (using the credits in the Hotshot Account) during the duration of the contest.
3. The Participant must not have been disqualified from the contest.
• In the case of a tie, the prize will be split equally among the relevant participants. For example, in relation to the Grand Prize, a tie for Grand Prize between two Participants means that both will share the cash prize of $20,000 equally between themselves i.e. S$10,000 each.
• All winners will be notified by mail at their registered address in Singapore. Prizes must be collected within a month from notification.
• If a participant's portfolio ranks among the top weekly or overall portfolios in each category in terms of performance, their registered name in their NRIC or Passports and/or their portfolio/holdings may be displayed on the contest website or in the newspaper. All Participants who win a prize shall agree to allow their names and photographs to be used in public communication medium such as, but not limited to newspaper, internet or television.

Trading Details

• Orders placed to buy or sell Macquarie warrants can be executed at any time of the day during trading hours (9:00 am - 12:30 pm, 2:00 pm - 4:59 pm). Participants will not be able to execute orders during the pre-open matching period (8:30 am - 8:59 am) and the pre-close matching period (5:00 pm - 5:05 pm).
• For warrants over Hong Kong underlying stocks, these will trade according to the Hong Kong market trading hours: 10:00 am - 12:30pm, and 2:30pm - 3:59pm. Participants will not be able to execute orders during the pre-open and pre-close matching periods also.
• For warrants over the HSI, these will trade according to the Hong Kong Hang Seng Index Futures trading hours: 9:45 am - 12:30 pm, and 2:30 pm - 4:28 pm.
• Price quotes for Hong Kong stocks will not be displayed on the contest website. There will be a link to take participants to the relevant webpage on the Hong Kong Stock Exchange website, where prices are quoted with a 15 minutes delay. However, the price quotes for warrants over Hong Kong stocks will be live.
• Quotes for HSI will not be displayed on the contest website. There will be a link to take participants to the relevant webpage on the HSI website. The price quotes for warrants over the HSI will be live.
• All orders for the day will expire if they are not matched by the end of the trading day. However, orders placed after markets close will be saved in the system and matched at the first minute after the respective markets open.
• Should a participant execute a large order, such as buying 1 million warrants on the offer when there is only 200,000 on the screen, the contest trading platform will execute the order in multiples of 200,000 with a 2 second lag e.g. Buy 200,000 warrants, and the next 200,000 warrants will be bought only after a 2 second lag. This feature attempts to simulate the real world, where issuers will replenish the volume on the offer at the same price in the warrants should the underlying share price not move and there is sufficient volume in the underlying for issuers to hedge their positions.
• Orders executed in the contest will be done immediately to simulate real time trading. However, participants should note that if the bid / offer quote in the warrant is $0.20 / $0.205, and if participants wish to buy the warrant and get their order filled immediately, they should pay the offer and buy the warrant at $0.205. If they choose to bid at $0.20, their order will be filled only when the warrant ticks down to $0.195 / $0.20.
• Participants can cancel or reduce the quantity of their buy and sell order if such an order has not been filled, i.e. in the 'Pending Orders' section.
• To increase the quantity of an order, a new order entry has to be made.
• Once an order has been filled, the order cannot be cancelled or amended.
• No odd lots may be traded. The minimum volume is set at 1,000 warrants or 1 board lot.
• Short selling of warrants will not be allowed. Participants can only sell warrants which they own, as there will not be a buy-in market for participants with overnight net short positions for the duration of the contest.
• In the event that an underlying stock is placed on a trading halt, the corresponding warrants will be placed on a trading halt in the contest.
• If an order is placed for a warrant whose underlying is on a trading halt or suspension, the order will not be processed until the trading halt or suspension is lifted.
• If a Participant holds a warrant whose underlying is on a trading halt or suspension, the warrant cannot be sold until the trading halt or suspension has been lifted. If there is a trading halt or suspension on an underlying stock at the end of the contest, the last quoted bid / offer price in the warrant before the trading halt or suspension will be used for the final valuation of the warrant.
• If an underlying stock is delisted on the SGX market, the corresponding warrants will be delisted in the contest.
• If a company and its corresponding warrants are delisted, a Participant's warrants will hold no value and its value will be removed from the Participant's portfolio.

Payments & Sale Proceeds

• There are no brokerage commissions, clearing fees, GST and any other miscellaneous charges in the simulated trading environment of the contest. Participants' profits and losses will be based on the capital gains and losses from trading the warrants.
• There will be no margin financing option in the contest.
• There will be no contra period for any warrants purchased. The payable amount will be immediately deducted from the participants' 'Cash Balance'.
• When submitting a buy order, there will be a check for sufficient funds (credits) in the participant's Cash Balance. Once a buy order is completed, the required amount will be immediately deducted from the participant's Cash Balance. If the order is rejected because the participant does not have enough 'Cash Balance', the participant needs to adjust the quantity of warrants or the limit price.
• When the participant's sell order has been executed, the sales proceeds will be immediately credited into the participant's Cash Balance. Under Realized Profit/ Loss, the participant can monitor the amount of realized profits or loss, if any.

Adjustments to Warrant Terms

• Ordinary dividends are incorporated into the price of a warrant so that on the ex-dividend date when the share price falls by the amount of the forecast dividend, the warrant price should not change.
• Special dividends, capital reduction and or any other corporate measures undertaken by a company may affect the price of the warrants. Macquarie will issue an official announcement on the SGX, stating the details of the adjusted strike prices and entitlement amounts on both the SGX website and Macquarie's Warrants Homepage. The adjusted strike prices and entitlement amounts will be automatically updated in the contest.

Investment Warrants

• Investment Warrants are a new type of warrant that Macquarie introduced to Singapore early in 2008. Different from conventional 'trading' warrants currently traded on the SGX, which typically have a contract expiry of three to six months, Investment Warrants have lower exercise prices and longer expiry dates, therefore giving them lower holding costs and a lower risk profile than conventional trading warrants.
• Investment Warrants allow investors to receive net ordinary dividend equivalent payments. Thus if a company declares a 50 cent net ordinary dividend, the investor will receive the full 50 cent equivalent payment if you purchase the proportionate number of Investment Warrants to entitle you to 1 underlying share. For example if you were holding an investment warrant with a warrants per share number of 10:1 and the underlying share announced a dividend of 50 cents, each warrant that you hold would be entitled to 5 cents (i.e. 50 cents divided by 10)
• On the SGX these dividend payments are distributed to the holder within 5 days of the dividend payment date. In the contest they will be credited to the investors account on the day of the ex-dividend date as the contest will only last eight weeks while the dividend paid date may be longer than the duration of the contest.
• Special dividends, capital reduction and or any other corporate measures undertaken by a company may be adjusted in the same way as a conventional trading warrant (see section above)

All the best to those who are participating in the contest.

Actual Operation of Warrant Trading (Part 4)

In this post, I’ll discuss a rather simple topic on the “Actual Operation of Warrant Trading”. This post will focus on the continuous quote of warrant trading. In Singapore, market makers provide liquidity to the market under a continuous quote system.

There are however under some circumstances that market makers will not be able to provide any quotation. The following is a list of such situations.

1. When the warrant is suspended from trading for any reason, including, without limitation, as a result of its underlying being suspended from trading;
2. In the event of the occurrence of a market disruption event, including, without limitation, any suspension of or limitation imposed on trading (including but not limited to unforeseen circumstances such as by reason of movements in price exceeding limits permitted by the SGX-ST or any act of god, war, riot, public disorder, explosion, terrorism or otherwise ) in a stock, or any warrant, option contract or futures contract relating to the stock;
3. When the issuer and/or the guarantor hold(s) less than 5% of the total issue size of the warrant (in which event, quotes will be for bid price only), that is, when the guarantor and its group of companies hold, in their proprietary position, less than 5% of the total issue size of the warrant, which, for the avoidance of doubt, shall exclude any unit of the warrant held by the guarantor and/or its groups of companies in a fiduciary or agency capacity;
4. During the period of five business days immediately prior to the expiry date of the warrant;
5. If the stock market experiences exceptional price movement and volatility, that is to say, during fast market; and
6. Where the market maker faces technical problems affecting the ability of the market maker to provide bid and offer quotations.

The most commonly seen situation is case 4 when the warrant is not tradable any more. I hope this post will give a rough idea to investors to the different situations why there are times when warrants do not have any quotes. In the next “Actual Operation of Warrant Trading” posting, I’ll be discussing about the calculation of warrant settlement price for both equities and index.