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Enoch Yiu

Liquidity and easy trading make market attractive
Hong Kong's warrant market has more than doubled in size in the past year, and 2008 is predicted to bring even more growth as volatile stock prices and bullish sentiment make the liquidity and easy trading of warrants popular with retail and institutional investors.
Because they are cheaper to trade than stocks, warrants are popular with day traders who buy and sell within several hours to take quick profit.
Day traders used to deal mostly in penny stocks, but the warrant market offers better liquidity as the underlying shares are normally those of large, blue-chip companies.
Narrowing of the trading spreads on stocks in recent years has also made them less attractive to day traders, so they have turned to warrants instead.
There were 4,499 outstanding warrants listed by  Hong Kong Exchanges and Clearing  as of Friday, up about 120 per cent from  last year, which in turn saw 50 per cent growth over 2005 levels.
Issuers predict this pace will continue, pushing the number of  outstanding warrants to more than 10,000 in the next year. There are  now 23 warrant issuers in Hong Kong, and several more are expected to enter the market next year,  including the Japanese bank Nomura.
The average daily turnover of the warrant market more than doubled  this year,  keeping pace with the boom in stock trading, although the share of warrant turnover has risen slightly, averaging almost 22 per cent.  Issuers estimate that more than half of the turnover comes from the retail sector.
The majority of Hong Kong warrant trades remains in call warrants, meaning a boom in demand for new issuance. 'We think 2008 will be another good year for warrants,' Edmond Lee, director of equity derivatives at Societe Generale, says.
Mr Lee advises that Chinese telecom warrants will be a good bet next year  due to restructuring, 3G activity and A-share listings. He also recommends warrants on domestic Hong Kong shares such as MTR Corporation and Bank of China Hong Kong.
Banks use the issuance of warrants to hedge their activity in over-the-counter options and other derivative trade. 'The more warrants we issue, the more risk we can spread,' Mr Lee says.
Institutional investors such as hedge funds are beginning to invest greater amounts of money in Hong Kong warrants as well, as they offer more liquid, transparent investments than the options markets, and the bid/offer spreads are narrower.
Issuers have also noticed an increase in what appears to be mainland institutional money betting on the movement of underlying H-share stocks.
'The attraction of the warrants is not so much the gearing,' says Matthew Wong, head of private investor products at ABN Amro, 'because some of the H  shares don't allow that much more gearing than you'd get from a margin account. But what makes them interesting is the liquidity because the issuers are so aggressive in offering liquidity.'
Hong Kong's warrant market is booming, thanks to a mix of clear regulatory control, aggressive issuance by banks and the bullish expectations of investors. In many cases, warrants have become easier and cheaper to trade than the underlying stocks themselves.
'Trading warrants does not require paying the 0.1 per cent stamp duty, which means warrant trading has a lower trading cost than stocks, where both the buyer and seller need to pay the 0.1 per cent stamp duty,'  Stockbrokers Association chairman Kenny Lee Yiu-sun says.
As an example, an investor with about HK$140,000 to buy China Mobile stock at HK$133.30 needs to pay HK$133,300 plus a trading cost of about HK$696.08 - the 0.1 per cent stamp duty, 0.15 per cent brokerage commission, 0.005 per cent stock exchange trading fee, 0.002 per cent clearing fee and 0.004 per cent levy payment - to the Securities and Futures Commission.
At those prices, a buyer of China Mobile shares needs to wait for the price to move some 60 cents to make a profit.
If the investor instead buys the same exposure in China Mobile warrants at 24.9 cents, the cost will only be HK$463.68 and the investor can make a profit of about HK$500 even if the warrant price rose only to 25 cents.
Good buys
Warrants are popular because they are cheaper to trade than stocks
The growth in outstanding warrants over last year as listed by the stock exchange: 120%



Investors jump on  warrants bandwagon