Signs of pain emerge as screw starts to turn

PUBLISHED : Thursday, 27 August, 1998, 12:00am
UPDATED : Thursday, 27 August, 1998, 12:00am

Debate about government intervention in the stock and futures markets continues to rage. Already there is evidence that at least one big US hedge fund has threatened to cut off all business with a Hong Kong stockbroker if that broker deals for the Hong Kong Government again in its intervention exercises.

This is one squeal of pain to tell the Government that it is having an impact.

Meanwhile, investors (if they can be called such) in the index futures market continue to say that they will roll over their August contracts into September and so evade the losses that the Government is trying to make them take when the August contract expires on Friday.

It is more easily said than done. The attraction of an index futures market is that a position can be settled by cash payment rather then requiring delivery of a commodity or rolling over the position into the next month. This one feature is what brings them so much turnover.

In fact, some local participants in the market who have long taken offence at the practices of foreign speculators earlier suggested to the Government that it abolish cash settlement, as a means of reforming the market.

The riposte of the futures exchange to this is that it would run contrary to established practice everywhere else in the world, and that it would severely restrict dealing in the market, almost to the point of crippling it.

Exactly, but it may just be what the Government wants to do and in a roundabout way is doing at the moment.

However, the figures show no compelling evidence just yet of an unusual rolling-over of August contracts into September contracts.

Open interest in the second-month contract usually rises towards the expiry of the first-month contract. If the holders of first-month contracts at the moment expect to roll over into the second month, they cannot all afford to wait until the Friday expiry date to do so. Their intentions would become obvious and the market would move against them.

They are therefore under some market pressure to take their second-month positions at an earlier date than they might otherwise do. But only on Tuesday did the number of open interest contracts in the second month exceed the first month.

This was the 18th trading day of the August contract and the record since the beginning of 1997 (see first chart below) shows that the 18th trading day is the average of when it happens.

Some futures players out there are taking big risks on what they can and cannot do in what is left over of this week.

Of course, in absolute terms, the number of open interest positions in either month is very high indeed.

Total open interest in Hang Seng Index futures at the moment is running at a record of almost 120,000 contracts, despite slumping prices and turnover on the stock market.

This only goes to demonstrate the Government's point that speculation in the market has grown to an unusual and possibly damaging level.

Intervention may be a band-aid solution, but some of the players in the market may be looking for bandages of their own come Monday.


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