Tomorrow, SGX will launch an Extended Settlement (ES) contract on the streetTRACKS STI ETF.

Just a recap, extended settlement contract is a new product launched by SGX two months ago. It allows one to take a long or short position on a stock for slightly more than a month without the need to put up the full cash value upfront.

Currently, there are 27 securities that have ES contracts on them, with 25 of them STI component stocks. The other two on the list are Keppel Land and Yanlord. With the addition of the STI ETF ES, there will now be 28 tradable ES.

Extended Settlement Contracts, or ES for short, started trading on SGX today. You might have read a couple of news articles on ES.

So, what exactly are Extended Settlement Contracts?

It is a futures contract that allow you to buy or sell shares of a particular company today but which will be settled at a future date.

It is every contra trader’s dream as it allows settlement of trades to be done up to one month later. This means a trader would have a longer time to hold his position. Compare this to a normal buy transaction which has to be settled in 3 days and a sell transaction which has to be covered within the same day.

Furthermore, as only a small percentage of the contract (called the margin) has to be paid upfront, leverage can be employed to magnify returns. This is a double-edge sword as losses can also be magnified.

The first trading day of each ES contract will be 25th of the month preceding the contract month. The last trading day will be the last Friday of the contract month. Settlement will be on the 3rd market day after the last trading day.

I won’t go into too much details about the technical aspects of ES contracts. You can read more about this on the ES faq and product guide:

ES FAQ

ES Product Guide

My comments on this product:

If the ES market is liquid enough, it may offer exciting arbitrage or hedging opportunities for the savvy investor. The ability to employ leverage and go long or short on a share without paying any financing cost is a plus point over CFDs. On the contrary, punters (who generally lose money) are given another tool which can be dangerous to their pockets.

Note that different brokerage houses are implementing trading of ES differently. Some can be done electonically but some require a broker to transact for you. Some require opening of sub-accounts with trades that won’t be settled into the CDP, while some allow trades to be settled direct into your CDP. This is going to make it more confusing for the layman.

SGX has clearly launched this product to attract more traders back into the market. From T+3 to T+30 is a great world of difference! Unfortunately, if the volume and liquidity of the ES market today is anything to go by, this product might turn out to be a dud. Liquidity is very poor with wider spreads than the mother shares. For example:

SIA.ES.0903, Semb Corp.ES.0903, SMRT.ES.0903, SPH.ES.0903 and StarHub.ES.0903 – No trades done for today

SembMar.ES.0903 – 10 lots done
SGX.ES.0903 – 23 lots done
SingTel.ES.0903 - 2 lots done
ST Engg.ES.0903 – 6 lots done

SGX will have to find a way to make it simpler for investors and also attract more institutional demand for this product to make it a success.

The next presentation after Steven Molnar was Peter Elsworth.

Peter Elsworth was a name unknown to me but he was supposed to teach us on E-Minis. Before Peter came on, Garry Kewish, a former president of Brian Tracy International, gave us an introduction on Peter and E-Minis.

Garry spent more than an hour telling us:

1. He is not really a trader.
2. E-Minis are good.
3. Peter Elsworth is the guru.
4. We can all make money from E-Minis.

There was a short part where Garry mentioned that E-Minis were better than options because:

1. Options have spreads of up to 20%.
2. 83% of options expire worthless.
3. Due to time decay, a 3-month option will lose up to 2/3 of the premium in the final month.

The introduction was getting a bit long and I was already very impatient when Peter Elsworth finally got up onto the stage. However, it got even worse.

Peter spent the next 30 minutes or so telling us why we should “invest” in his trading training package. Towards the end, I gave up and decided to go to the Metro sale happening in the adjacent hall to buy some stuff.

This was one presentation where I learnt nothing.

I didn’t know much about trading E-minis before Garry and Peter started, and I didn’t know any bit more when they ended.

A futures is an agreement between 2 parties to buy/sell a certain asset on a future date. It is typically used by people dealing in that commodity to hedge their position.

For example, oil might be trading at US$100/barrel now.

In the futures market, a company that uses oil in its daily operation might want to buy a 1-month futures at US$105/barrel if they think the price of oil is going up. Similarly, a company that produces oil can sell the futures to lock in their future selling price. The price of the futures will be higher than the current rate if people are bullish and vice versa.

This means that no matter what happens to the price of oil in a month, the company can (and have to) transact at the agreed price. Unlike options, for futures you are required to exercise your right when settlement comes.

The way the futures market work is that no actual exchange of product takes place. Rather, the price difference is used to determine the profit or loss.

In my example above whereby the company bought a $105/barrel futures, if price of oil goes up to $110, the company will be better off by $5/barrel than if it would have if it didn’t buy the futures.

If it drops to $95, it will be worse off by $10/barrel.

Futures are traded in contracts. Each contract will be equal to a certain quantity of the underlying asset.

There are futures for all sorts of things, from commodities to prices of financial products. It is also a leveraged product, which means you can lose your pants if you are using it for speculative trading and your trade goes against you.

CFDs would be another instrument which is very similar to futures.

A few days ago, Singapore Exchange Limited (SGX) announced some rule amendments that will allow product offerings on a broader suite of asset classes in the securities market.

The new rules expand the application of existing Singapore Exchange Securities Trading (SGX-ST) Rules and Central Depository (CDP) Clearing Rules to allow trading of listed structured products based on futures prices.

With the rule change, financial institutions will probably be coming up with more innovative products to offer to retail investors.

Listed futures?

However, unless there is sufficient interest and liquidty, we will probably still need the issuers to be a market maker for these products for them to be successful.