To boost trading liquidity, waive commissions and fees on trading of structured warrants

I REFER to the article “It’s time to employ innovative strategies to boost valuations in Singapore stocks” (BT, Mar 27, 2024).

As a long-time investor in Singapore stocks, I fully agree with the sentiments voiced in the article. The stocks listed on the Singapore Exchange are listless and unexciting. It has been more than 16 years since the Straits Times Index (STI) peaked and to date, the index is nowhere near its previous high, while US stock indices have gone on to more than treble.

I would like to suggest a quick and easy way to boost the trading liquidity and valuation of stocks listed on SGX – SGX and brokerage companies should waive commissions and fees on the trading of structured warrants.

When an investor buys a share of a call – that is, bullish – structured warrant from the warrant issuer, the warrant issuer will hedge its position by buying a fraction of a share in the underlying shares. While conventional financial textbooks say that it is the underlying shares that drive the movement of the structured warrants, a pricing error in a structured warrant some 20 years ago convinced me otherwise.

In 2005, an 80 per cent decline in a structured warrant on Total Access Communications due to a pricing error caused the underlying shares to decline by 13 per cent at one stage.

Instead of the structured warrant correcting itself to reflect the price of the underlying shares, the hedging actions of the warrant issuer drove down the underlying shares until the point the error was discovered. This incident points to the power of structured warrants in driving the movement of underlying shares.

I should also point out that the STI peak some 16 years ago coincided with high trading volumes on structured warrants. Today, the number of structured warrants on SGX stocks has declined considerably, tracking the fall in trading volume.

If SGX and brokerage firms wish to boost the liquidity and valuation of SGX stocks, I suggest that they consider my suggestion. If liquidity takes off, whatever commissions and fees foregone on the structured warrants would be recovered many times over from those on the underlying shares. There is nothing to lose. and it is a low-hanging fruit while market participants study and implement longer-term measures to boost stock valuations.

Lee Chin Wai