Published On: Tue, Nov 10th, 2009

Study Finds Overseas Listing Of Futures Contracts Benefits Home Exchanges

9 November 2009 – A study by the Capital Markets Cooperative Research Centre has found that trading in overseas-listed futures contracts benefits both the index futures as well as its component stocks in the home exchanges. 

This is the first study to examine how the trading activities of the home markets are affected by the additional listing of a similar index future in a foreign market.  Singapore Exchange Limited (SGX) was chosen as “it provides an ideal experimental setting for examining the relationship between cross-border exchanges, as it is a satellite hub that facilitates the trading of numerous dual-listed financial derivatives,” said Professors Alex Frino and Frederick H. deB. Harris and Mr Wong Jin Boon in their paper, entitled “The relationship between satellite market and home market volumes: evidence from cross-listed Singapore futures contracts.”

The study analyzed the relationships between the following SGX-listed futures and the corresponding contracts traded on their home exchanges:

SGX-listed futures contract Home futures contract Home exchange
SGX MSCI Taiwan Index futures Taiwan Stock Exchange Capitalization Weighted Stock Index futures Taiwan Futures Exchange (TAIFEX)
SGX Nikkei 225 Index futures Nikkei 225 Index futures Osaka Stock Exchange (OSE)
SGX CNX Nifty Index futures S&P CNX Nifty Index futures National Stock Exchange (NSE), India

Over a five-year sample period, the study found that a 10% increase in notional turnover of the SGX-listed futures contracts resulted in a corresponding increase in turnover of the home futures contracts, as well as their component stocks:

10% increase in notional turnover of SGX-listed futures contract Increase in turnover of home futures contract Increase in turnover of component stocks
SGX MSCI Taiwan Index futures



SGX Nikkei 225 Index futures



SGX CNX Nifty Index futures



“We postulate that the link in the turnover of the futures and the component stocks is due predominantly to arbitrage trading and hedging by market participants.  It is also possible that the additional offshore listing has increased the investors’ base,” said the authors in the study.

“Our study indicates that there is a positive and statistically significant relationship between the turnover of SGX-listed index futures and those of the domestic exchanges.  In light of our findings, the relevant exchanges might wish to formulate a plan that involves promoting arbitrage trading amongst the simultaneously traded cross-listed securities (and the component stocks), to attract even more trading by global financial institutions,” said Prof Frino, Professor of Finance, University of Sydney and CEO of Capital Markets Cooperative Research Centre, which brings innovative research and technology to the capital markets domain.

“We have always believed that our provision of a one-stop, pan-Asian equity derivatives platform increases trading in these products, in part due to the margin efficiency benefits.  The SGX liquidity pool plays a part in boosting liquidity and efficiency of the underlying cash markets around the region to the benefit of all, as arbitrage opportunities stimulate further global interest in the home markets.  We are pleased by the findings of this study as it validates that we are on the right path,” said Mr Thomas Tey, Senior Vice President & Head of Product Management at SGX.

The full report can be downloaded here

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