Investment funds targeted by the Government in its interventionist drive appear to be extending their index futures market bets into September, helping to drive open interest to a record high. Despite the trend, traders believe that Friday - when the August contract expires - could still see volatile trade, with a complex, three-way tug of war between the Hong Kong Monetary Authority (HKMA), index arbitrageurs and speculators. Official figures show that many funds have been rolling their August contracts into September, which along with official trades have pushed the level of open interest to 116,763 contracts on Monday, a new record. The previous record of 113,062 contracts was set on July 29. 'They [the HKMA] want to banish the speculators and squeeze the market upwards. [Open interest] is increasing quite substantially in September,' Tai Fook Securities deputy managing director Lennon Chan Wing-luk said yesterday. Open interest data - which tallies the number of positions not yet delivered, liquidated or closed - is released with a one trading day lag. Monday's record figure represents 116,763 long and 116,763 short positions. 'Roll-over activity into September will be the thing to watch all week,' one research head said. 'The Government will be fighting the bears with one hand [by intervening] and providing them ammunition with the other, when they announce on Friday what their revised 1998 GDP estimate will be.' Most analysts expect a second-quarter decline - which will also be released on Friday - of about 5 per cent in the gross domestic product. At the close of trade on Monday, there were 57,496 open positions in September against 17,685 on August 13, the day before the HKMA launched its blitz on the stock and futures markets to try to drive speculators out and defend the currency board. Over the same period, August's tally declined from 93,490 contracts to 58,335. Traders noted that while the number of September positions rose sharply on Monday as the Government spent heavily for a sixth trading day, open August positions jumped almost 1 per cent over Friday. Market-watchers said if the Government's foray into the stock and futures markets was beginning to have the intended effect, open interest would have fallen as funds exited the market. The picture was complicated, however, as the Government had been expanding its own holdings, they said. Brokers acting on behalf of the Government were yesterday said to have been selling September positions, while buying this month's contract to make it costlier for the speculators to roll over their bearish stance. The August contract closed yesterday at 7,955 points, compared with the cash market's 7,890.09. The September contract ended at 7,850 points. Since the intervention was launched on August 14, the Hang Seng Index has climbed more than 18 per cent, making it one of the best performing benchmarks in the world. 'Time is on the side of the speculators, not the HKMA,' Prudential Bache Securities analyst Robert Rountree told clients, adding the peg would hold in the months ahead. Traders said yesterday's cost of rolling a short contract forward was about 1.33 per cent of the value of the position, essentially the difference between the August and September rates. 'They [most funds] are willing just to roll it,' another player said. 'They can absorb the cost.' Traders warned that despite the rolls and apparent government bid to drive September's price lower, Friday might still see some interesting - and potentially volatile - trade. A third party, index arbitrageurs, who exploit short-term differences between cash and futures markets - have been taking the other side of many speculators' and government trades, selling August and buying September. Traders said that arbitrageurs would be forced to close out their remaining August positions as the month came to a close and could be tempted to unload baskets of stocks in the cash market to try to drive the Hang Seng Index lower. Such a move would run counter to the government initiative and could spark a tug of war, they said. 'Friday becomes a very interesting day,' the player said.
