My Take on Contra Trading

Contra trading in Singapore is basically buying and selling a stock without forking out any cash. So if one were to buy a stock on Monday, one can sell on any following day till next Monday(T+5) without paying for the stock. Once you contra, you either gain the profit or pay for the losses incurred. This form of trading has been favored by retail traders due to the convenience of no upfront settlement, which gives them the ability to rotate their funds to other counters for more flexibility.

Some may not realize that contra trading is also a leveraging machine which can be geared infinitely. You can buy infinite times more than what you can actually pay as long as you have the trading limit to do so. If you have multiple accounts, your risk will be multiplied exponentially. Hence the only risk mitigation you have is your personal trading limit. This means that this form of trading has the potential to be riskier than most of the derivatives out there. This is also one of the reason why derivatives like ES(extended settlement), CFD, Futures and Options trading are currently lukewarm in Singapore.

This being said, Singapore and Malaysia are currently the only two countries that allows contra trading. While I acknowledge the potential risk, this system of trading is also giving a boost to our local market as it is provides a source of important liquidity. It also enables investors/traders to catch more opportunities when they see them. In a strictly non contra system of trading, one cannot sell their purchased shares until the shares are fully paid up, this means they have to park money in their trust and top up when it is used up. This makes for more down time and down time may not be favorable for traders.

Contra trading is a system that is beneficial for our local market as it provides the necessary liquidity to our market and the convenience for retail traders. However, it is susceptible to abuse to those who are oblivious to the risk involved. It is analogous to a knife, you can use it for convenience(slicing fruits) or harm(murder). So analogously, we shouldn't ban the knife because it can cause harm, but rather, we should punish those who use it to cause harm to others.

2 comments :

  1. Greatly explained contra trading! I was not aware of this term and get to know only because of you. I must say that you did great work. Have a great day!
    cfd market

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