Patrick N. Crowl, ContributorFOR THE first two months of the current year, the average number of trades per day was 192 versus 550 for the same period last year. Since there are only 11 institutions registered to trade securities in the local market, the average number of equity trades per day per institution was 17.
These statistics along with the fact that a number of the regional exchanges close between 12 noon and 1 p.m., and that some of the exchanges trade part time, clearly indicate that more activity is needed in the market. I am very surprised that traders have not yet taken up golf or fishing to fill up the rest of their day.
There is a plethora of equity, interest rate, currency and fixed- income based derivatives that make up the daily diet of most securities markets around the world. If systematically intro-duced in phases to the local market, these products could provide good action for traders to increase returns (using leverage), widen spreads and increase the opportunity to hedge against risks and market movements.
CONTRIVED PRODUCT
A derivative is a contrived product, in that it derives its value from another security. It is a security whose price is dependent on or derives its value/price from an underlying asset. Derivatives are merely contracts between two or more parties. Its value is determined by fluctuations in the underlying asset.
In the Jamaican market, investors can speculate on the short-term (five-10 trading days) direction of a number of securities. They are however unable to take calculated risks and 'short' the security with the plan to buy it much cheaper within or at the end of those five-10 days because short selling is not allowed either through the exchange or over the counter (OTC). (Short selling is the process by which investors sell a security that they don't have, hoping to buy it back at a cheaper price than they sold it for.)
If short selling were allowed, investors (funds, institutions and individuals) could hedge their positions using simple long/short neutral trades or beta analysis. Another simple equity-based derivative much like an option that requires little else but the pairing of at least two investors with the same appetite for risk whose analysis and assessment of a security are diametrically opposed is the Contract For Difference (CFD).
The CFD is the agreement between two parts to exchange the difference between the opening value and the closing value of an instrument. A CFD transaction acts just like a margin trade.
Swaps are another product class with a wide variety that would add some needed fizz to the market. Swaps are agreements between two 'counter' parties in which the cash flows from two assets are exchanged as they are received for a fixed time period. One can contrive a swap from interest rates, currency, equities and commodities. At the inception of the agreement, the terms are set so that its present value is zero for both parties.
The one that would be most applicable in the Jamaican context would be a simple interest rate swap, considering the volume, frequency, and rate-type variation of our local bond market issues and the financing requirements of corporate Jamaica. .
The local equities market has 'gone south' for the past 11 months, leaving traders to rummage through the interested investors for one-directional trades (long) and investors finding little else to do with their liquidity than to buy fixed- income instruments.
There has been no better time than now for the regional securities markets to introduce new products to the menu ... The appetite needs to be satiated. Our regulatory bodies need to promote and support the idea of having greater product depth within the local securities market.
Any new products ... even one, would provide greater 'options' for traders and investors.
Patrick N. Crowl is the funds and research manager at Barita Unit Trusts.
