Warrants Specialist

When buying structured warrants, one must make sure that he is not buying the warrants at very high valuation so that the instruments track the underlying movement effectively.  One way to better equipped in trading structured warrants is to look at issuers’ market making activities.  Unlike warrant traders in Hong Kong, we are not as fortunate to be able to lay our hands on issuers’ market making activities on a daily basis.  Bursa Malaysia only requires issuers to publish their market making activities at the end of the month.



The following table is an extract from AmInvestment Bank Market Making activities report from November 2010.  The information provided by the issuers contains each warrants amount outstanding, number of warrants bought and sold during the month and the average prices.  Notably missing from the information is the portion of warrants held by the public.  




This information is only listed on the Quarterly Report by the issuers as shown below.  (Extracted from CIMB Quarterly Market Making Report ending September)



Percentage of warrants held by public is actually more useful information for buying and selling warrants. 


In order to make money from structured warrants, it is important for investors to understand issuers’ business model.  Issuers make money by selling warrants for a premium.  How much premium they make is typically determined by warrants pricing model.  As private placement of warrants is no longer feasible under current environment, issuers will have to sell the warrants in the open market.  The best time to sell and be able to maximize the profit would be during the first few days of initial listing of the warrants.  This is because after some time, interest in the older warrants fades (unless there is a big movement in the mother share) and issuers go on to issue another warrant of the same underlying.


As a trader, we must know where the buying and selling are from.  For warrants with high percentage holdings by the public, we are most likely be buying and selling to other retail investors.  For warrants with low percentage holdings by the public, we are most likely to be trading against the issuers.


In Hong Kong, issuers will advise the public to trade the warrants with low public percentage holdings because issuers will strive to market make so that their warrants track the underlying movement closely.  If the public holdings percentage is high, issuers may not be able to market make effectively due to the presence of large retail buying and selling in that particular warrant.


In Malaysia, the above theory does not really work.  Whereas there are many issuers in Hong Kong who would buy up their competitors’ warrants the moment they are underpriced (in terms of implied volatility), Malaysia warrants market is different because there are so few players and the bid-ask spread is large.


In Malaysia, it may be better to trade a warrant with higher public holdings so that we can get better bid-ask spread.


Alan Voon

Warrants Specialist