Global investing has never been easier. With financial markets becoming increasingly interconnected, investors are looking beyond their home markets to diversify and capitalise on global opportunities. However, traditional cross-border investing often involves navigating complex brokerage accounts, foreign exchange risks, and additional transaction fees.
SDRs offer investors access to foreign-listed stocks while keeping transactions in SGD, enabling portfolio diversification without the need for foreign brokerage accounts or complex cross-border transactions.
Since their launch in May 2023, SDRs have emerged as an attractive option for traders seeking to capitalise on global market opportunities. However, SDR trading comes with unique challenges, particularly currency risk and market maker risk. To navigate these risks effectively, investors must develop a solid understanding of how SDRs work and implement strategies to manage and mitigate potential downside risk.
This article delves into the key risks of SDR trading and provides actionable strategies to help investors enhance their trading efficiency and profitability.
Managing Currency Risk
Understanding the Risk
SDRs are denominated in SGD, but their underlying assets are often priced in foreign currencies such as Thai Baht (THB) or Hong Kong Dollar (HKD). Even if the stock price remains unchanged, fluctuations in forex rates can impact the SDR’s price, leading to unexpected gains or losses.
Strategies for Managing Currency Risk
1. Forex Monitoring
Investors can benefit from tracking SGD/THB and SGD/HKD exchange rates to anticipate potential currency fluctuations. A weakening foreign currency against SGD can impact the SDR’s price even if the stock itself remains stable.
2. Overnight Position Control
Holding large overnight positions in SDRs carries forex-related risks. Traders should assess forex trends and adjust their positions accordingly to mitigate potential losses from overnight currency fluctuations.
By actively monitoring forex movements and adjusting exposure, investors can minimise the impact of currency volatility on SDR trading.
Managing Market Maker Risk
Understanding the Risk
Market makers play a crucial role in providing liquidity for SDRs. However, in less actively traded SDRs, they may widen bid-ask spreads, increasing trading costs for investors looking to enter and exit positions.
Understanding market maker behavior is essential for ensuring efficient trade execution and risk management.
Strategies for Managing Market Maker Risk
1. Using Advanced Order Types
Traders can use Limit-if-Touched and Stop-Limit Orders to execute trades at preferred price levels rather than being affected by sudden bid-ask spread widening.
2. Trading During Peak Liquidity Hour
Market makers adjust spreads based on trading activity. Executing SDR trades during periods of higher liquidity can help investors secure better pricing and smoother trade execution.
3. Monitoring Market Depth
Checking the order book can provide insights into buy and sell orders, ensuring transparency in the market and helping traders avoid illiquid SDRs with erratic spreads.
By implementing these strategies, traders can improve execution quality and mitigate risks associated with market makers.
Conclusion
SDR trading gives investors a convenient way to access foreign stocks while transacting in SGD.
However, successful navigation in this market requires a solid understanding of risks such as currency fluctuations and market maker behavior.
By monitoring forex trends, managing overnight exposure, utilising advanced order types, and trading during peak liquidity hours, investors can enhance their potential profitability while minimising the risks.
For those looking to explore SDR trading further, adopting these best practices can lead to a more informed and strategic approach to navigate the market.
Contributor:
Alex Low
Principal Investment Specialist
Phillip Securities Pte Ltd (A member of PhillipCapital)
https://bit.ly/TTPalexlow
Disclaimer
These commentaries are intended for general circulation. It does not have regard to the specific investment objectives, financial situation and particular needs of any person who may receive this document. Accordingly, no warranty whatsoever is given and no liability whatsoever is accepted for any loss arising whether directly or indirectly as a result of any person acting based on this information. Opinions expressed in these commentaries are subject to change without notice. Investments are subject to investment risks including the possible loss of the principal amount invested. The value of the units and the income from them may fall as well as rise. Past performance figures as well as any projection or forecast used in these commentaries are not necessarily indicative of future or likely performance. Phillip Securities Pte Ltd (PSPL), its directors, connected persons or employees may from time to time have an interest in the financial instruments mentioned in these commentaries. Investors may wish to seek advice from a financial adviser before investing. In the event that investors choose not to seek advice from a financial adviser, they should consider whether the investment is suitable for them.
The information contained in these commentaries has been obtained from public sources which PSPL has no reason to believe are unreliable and any analysis, forecasts, projections, expectations and opinions (collectively the “Research”) contained in these commentaries are based on such information and are expressions of belief only. PSPL has not verified this information and no representation or warranty, express or implied, is made that such information or Research is accurate, complete or verified or should be relied upon as such. Any such information or Research contained in these commentaries are subject to change, and PSPL shall not have any responsibility to maintain the information or Research made available or to supply any corrections, updates or releases in connection therewith. In no event will PSPL be liable for any special, indirect, incidental or consequential damages which may be incurred from the use of the information or Research made available, even if it has been advised of the possibility of such damages. The companies and their employees mentioned in these commentaries cannot be held liable for any errors, inaccuracies and/or omissions howsoever caused. Any opinion or advice herein is made on a general basis and is subject to change without notice. The information provided in these commentaries may contain optimistic statements regarding future events or future financial performance of countries, markets or companies. You must make your own financial assessment of the relevance, accuracy and adequacy of the information provided in these commentaries.
Views and any strategies described in these commentaries may not be suitable for all investors. Opinions expressed herein may differ from the opinions expressed by other units of PSPL or its connected persons and associates. Any reference to or discussion of investment products or commodities in these commentaries is purely for illustrative purposes only and must not be construed as a recommendation, an offer or solicitation for the subscription, purchase or sale of the investment products or commodities mentioned.
