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Cathy Holcombe

Brokers say the futures market will be vulnerable to heightened volatility when its extended trading hours start today and the stock exchange may be forced eventually to match the longer hours.

 They denied that the market would be open to manipulation - as the Stock Exchange of Hong Kong (SEHK) charged earlier this week - saying surveillance was too tight.

 'People might try to lead the opening up a bit to influence the cash market but it will be very detectable and I don't think they will be doing it for long,' Jardine Fleming broking head Christopher Rampton said.

 Both the Hong Kong Futures Exchange (HKFE) and the Securities and Futures Commission (SFC) will be closely monitoring all trades during the extended HKFE trading period - 15 minutes earlier and later than the cash market hours.

 Opponents say that it takes less purchasing power to move a futures contract than the Hang Seng Index (HSI).

 Thus manipulators may try to influence futures when the HSI is not trading, in hopes of later cashing in on weightier positions in equities.

 SFC spokesman Bill Weeks said: 'We consider it vitally important that the integrity and stability of the market be maintained . . . we will monitor very carefully including direct observance of market behaviour.'  He said the HKFE would compile volatility reports and other relevant trading statistics on a daily basis.

 Though few expect outright manipulation, brokers say it is inevitable that the futures will trade differently without the guide of the cash market.

 'Before the [SEHK] is open futures will be trading on expectations . . . when you have the stock market you can use it as reference,' a derivatives manager at a European brokerage said.

 Furthermore, the futures contract will trade for half an hour without the influence of arbitrage - trading on price differences between the cash and futures - which tends to push the markets toward equilibrium.

 'You're going to have a period when arbitrage between cash and futures is not going to be possible,' Salomon Smith Barney Asian quantitative analysis head Deep Kapur said.

 'In terms of the actual pricing of the futures contract, that is obviously not going to reflect whatever is going on in the cash market because it doesn't actually exist.

 'But it is similar to some of the Hong Kong stocks trading in the UK after hours [of SEHK]. I don't see this as a major problem.'  The HKFE used to trade five minutes longer than the cash market until February, when the stock exchange extended its hours.

 'The stock exchange didn't like the futures trading longer - they didn't want people to manipulate the market,' said DBS Securities strategist Frederick Tsang.

 He said he thought it 'would be appropriate' for the SEHK to extend its trading hours.

 Mr Rampton agreed: 'Now that we have been spooked into this decision [to extend HKFE hours] I think it is only a matter of time before the stock exchange follows suit.'  The stock exchange has said it was against the decision to allow the HKFE to trade longer hours but that it would not change its own trading hours. A spokesman said yesterday this policy was not being reviewed.

 Many index futures markets around the world trade later than their underlying cash markets, including London and Chicago.



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