03-11-2014, 07:57 PM
Appreciate any comments on the following points raised....thanks
The Singapore Exchange (SGX) has introduced measures since the beginning of this year to improve trading liquidity, market transparency and promote orderly trading and responsible investing.
While the intentions to improve market conditions are good, they do not address certain issues and the underlying problems behind the low market volumes and retail participation rates.
Trading liquidity and market transparency
The following is a summary of the measures introduced by SGX:
1. The standard board lot size of securities will be reduced from 1,000 to 100 units from 19 January 2015 and eventually to 1 unit to improve affordability for retail investors.
2. The clearing fee will be reduced from 0.04% to 0.0325% of contract value. The cap of S$600 on this fee for contracts of S$1.5 million, or more, will be removed.
3. Transfer and onward settlements pursuant to on-exchange transactions on SGX-ST will be standardised to a charge of S$30 per settlement instruction.
4. Settlement fees for all settlements not pursuant to transactions on SGX-ST (i.e. not pursuant to an on-exchange transaction) will be standardised to a charge of 1.5 basis points of the settlement value (min S$75) per settlement instruction.
5. SGX introduced incentive schemes to facilitate the participation of market makers and liquidity providers since June 2014. Market makers and liquidity providers are incentivized through clearing fee rebates and depending on if they are price-taking/making in nature. Rebates can potentially reduce clearing fees to zero for market makers (more stringent criterions and commitment) and up to 75% for liquidity providers.
Promoting orderly trading and responsible investing
The following is a summary of the regulations in response to the penny stock meltdown to be introduced as proposed by SGX and the Monetary Authority of Singapore (MAS):
1. Introduce a minimum trading price of S$0.20 as a continuing listing requirement for issuers listed on the SGX Mainboard.
2. Securities intermediaries to collect minimum 5% of collateral from their customers for trading of listed securities to promote financial prudence. This will help mitigate the risk of excessive leverage assumed by investors. It will also reduce reliance on remisiers to manage the credit risk exposures of customers.
3. Shorten the settlement cycle from T+3 to T+2 days by 2016.
4. Implement aggregate short position reporting to further enhance transparency of short selling activities in the securities market. The value threshold has been adjusted upwards such that only short positions that exceed the lower of 0.05% or S$1 million of issued shares will have to be reported.
5. The Securities Association of Singapore (SAS) will take the lead to develop industry guidelines for the dissemination of information on trading restrictions imposed by their members to prevent information asymmetry.
6. SGX will establish three independent committees, namely Listings Advisory Committee, Listings Disciplinary Committee and Listings Appeals Committee. They will introduce a wider range of sanctions for breaches of listing rules.
Underlying problems for the lacklustre market trading volumes
1. Quality of the companies listed on SGX matters, not the absolute share price
SGX's chief executive Magnus Bocker claims that a minimum share price on mainboard-listed companies will address the risks associated with penny stocks which have little research coverage and are avoided by institutional investors.
However, this overlooks the main reason that penny stocks represent low quality companies with consistently poor financial performance e.g. several of the S-chips listed on the SGX and the constant need to do dilutive equity fund raising results in their penny stock status.
Forcing such companies to consolidate their outstanding number of shares such that their absolute share price is at or above S$0.20 does not eliminate the problem. Instead, SGX should impose more stringent criteria on such low quality companies so that they are delisted if they are unable to turn around their financial performance.
In addition, Institutional investors do not select their investments based on absolute share price but instead focus on the market capitalisation, trading liquidity, quality and valuations of the underlying stocks.
Finally, good quality companies which enjoy strong share price appreciation often undertake stock splits and bonus issues to improve trading liquidity and affordability so having a low absolute share price does not mean the company is of poor quality.
2. Lack of big cap listings with strong structural growth stories in the FTSE Straits Times Index (STI)
The STI is dominated by banks, oil & gas, property, REITs, and commodity traders.
As these sectors, other than the banks, are largely out of favour amongst investors especially with the expected increase in US interest rates and the strengthening US dollar, it is no surprise that the STI has underperformed its regional peers such as Indonesia and the Philippines whose listed companies are riding on the coat-tails of the strong domestic economies.
SGX should look to attract listings that are riding on strong structural growth stories that will attract more institutional investors to the Singapore bourse.
These could include companies operating in sectors such as cloud computing, e-commerce (Alibaba), environmental/pollution control, factory automation, infrastructure plays in emerging markets and renewable energy.
SGX's tie-ups with regional exchanges are a good start but it should forget about secondary listings of US and European stocks as trading liquidity is very poor and investors tend to buy such stocks in their primary listing market due to differences in trading hours.
Issues to be addressed
1. Declining commission income for the securities intermediaries will hurt SGX in the long-run
Brokerage commissions for securities intermediaries have been on a downtrend since the liberalisation of the industry over a decade ago especially with the advent of Internet trading and with a double whammy from lacklustre trading volumes, many remisiers have been calling it a day as their commissions dwindle.
http://www.businesstimes.com.sg/stocks/s...e-dries-up
SGX needs to address the declining trend of commission income as it has been proven that lowering brokerage rates does not result in higher market volumes.
Similar to what agents are to insurance companies, remisiers represent the front-line sales force for SGX in attracting new clients and servicing existing clients.
With remisiers being forced to leave the industry due to unsustainable low commissions, it is no wonder that trading volumes are dwindling.
Imagine what the growth of the insurance industry would be like without insurance agents!
Unlike SGX which is a monopoly with the ability to increase its income by revising its annual listing fees (the most recent revision for Mainboard companies was on 1 January 2014), securities intermediaries have no such means available to them to boost their income.
SGX also needs to address what should be the floor for brokerage rates when the standard board lot size is eventually reduced to 1 unit.
It does not make financial sense for an investor to buy 100 units of a stock trading at S$0.20 i.e. S$20 with the current minimum brokerage rate of approximately S$25.
The reduction in standard board lot size may also lead to lower market volumes as investors buy in smaller quantities and will lead to lower income for the securities intermediaries.
2. Improve investor education to raise retail participation rates
SGX head of securities Nels Friets mentioned his desire to raise retail participation rates in equities investments.
Currently, the proportion of the population who make at least one trade every three months is at 8 per cent in Singapore, compared to 17 per cent in Australia and 24 per cent in Hong Kong.
He suggests that the reduction in standard board lot size will result in change in behaviour from trading pennies to buying and holding of the blue chips.
However, if all retail participants adopt a buy and hold strategy and engage in less trading, this will result in lower market volumes!
SGX should consider increasing its efforts to improve investor education about investing in equities as part of holding a diversified investment portfolio.
As mentioned earlier, the key is to increase the number of good quality companies listed on the SGX which will make investors comfortable with increasing their exposure to equities.
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Trading volumes suggest that the switch to full-day trading on the SGX has not increased volumes.
In fact, bourses with shorter trading hours such as Korea and Taiwan generate significantly higher trading volumes.
This is attributable to the depth of their financial markets and their strong niche in technology offerings.
SGX should improve the welfare of personnel working in securities intermediaries and restore the lunch break or shorten its trading hours.
The Singapore Exchange (SGX) has introduced measures since the beginning of this year to improve trading liquidity, market transparency and promote orderly trading and responsible investing.
While the intentions to improve market conditions are good, they do not address certain issues and the underlying problems behind the low market volumes and retail participation rates.
Trading liquidity and market transparency
The following is a summary of the measures introduced by SGX:
1. The standard board lot size of securities will be reduced from 1,000 to 100 units from 19 January 2015 and eventually to 1 unit to improve affordability for retail investors.
2. The clearing fee will be reduced from 0.04% to 0.0325% of contract value. The cap of S$600 on this fee for contracts of S$1.5 million, or more, will be removed.
3. Transfer and onward settlements pursuant to on-exchange transactions on SGX-ST will be standardised to a charge of S$30 per settlement instruction.
4. Settlement fees for all settlements not pursuant to transactions on SGX-ST (i.e. not pursuant to an on-exchange transaction) will be standardised to a charge of 1.5 basis points of the settlement value (min S$75) per settlement instruction.
5. SGX introduced incentive schemes to facilitate the participation of market makers and liquidity providers since June 2014. Market makers and liquidity providers are incentivized through clearing fee rebates and depending on if they are price-taking/making in nature. Rebates can potentially reduce clearing fees to zero for market makers (more stringent criterions and commitment) and up to 75% for liquidity providers.
Promoting orderly trading and responsible investing
The following is a summary of the regulations in response to the penny stock meltdown to be introduced as proposed by SGX and the Monetary Authority of Singapore (MAS):
1. Introduce a minimum trading price of S$0.20 as a continuing listing requirement for issuers listed on the SGX Mainboard.
2. Securities intermediaries to collect minimum 5% of collateral from their customers for trading of listed securities to promote financial prudence. This will help mitigate the risk of excessive leverage assumed by investors. It will also reduce reliance on remisiers to manage the credit risk exposures of customers.
3. Shorten the settlement cycle from T+3 to T+2 days by 2016.
4. Implement aggregate short position reporting to further enhance transparency of short selling activities in the securities market. The value threshold has been adjusted upwards such that only short positions that exceed the lower of 0.05% or S$1 million of issued shares will have to be reported.
5. The Securities Association of Singapore (SAS) will take the lead to develop industry guidelines for the dissemination of information on trading restrictions imposed by their members to prevent information asymmetry.
6. SGX will establish three independent committees, namely Listings Advisory Committee, Listings Disciplinary Committee and Listings Appeals Committee. They will introduce a wider range of sanctions for breaches of listing rules.
Underlying problems for the lacklustre market trading volumes
1. Quality of the companies listed on SGX matters, not the absolute share price
SGX's chief executive Magnus Bocker claims that a minimum share price on mainboard-listed companies will address the risks associated with penny stocks which have little research coverage and are avoided by institutional investors.
However, this overlooks the main reason that penny stocks represent low quality companies with consistently poor financial performance e.g. several of the S-chips listed on the SGX and the constant need to do dilutive equity fund raising results in their penny stock status.
Forcing such companies to consolidate their outstanding number of shares such that their absolute share price is at or above S$0.20 does not eliminate the problem. Instead, SGX should impose more stringent criteria on such low quality companies so that they are delisted if they are unable to turn around their financial performance.
In addition, Institutional investors do not select their investments based on absolute share price but instead focus on the market capitalisation, trading liquidity, quality and valuations of the underlying stocks.
Finally, good quality companies which enjoy strong share price appreciation often undertake stock splits and bonus issues to improve trading liquidity and affordability so having a low absolute share price does not mean the company is of poor quality.
2. Lack of big cap listings with strong structural growth stories in the FTSE Straits Times Index (STI)
The STI is dominated by banks, oil & gas, property, REITs, and commodity traders.
As these sectors, other than the banks, are largely out of favour amongst investors especially with the expected increase in US interest rates and the strengthening US dollar, it is no surprise that the STI has underperformed its regional peers such as Indonesia and the Philippines whose listed companies are riding on the coat-tails of the strong domestic economies.
SGX should look to attract listings that are riding on strong structural growth stories that will attract more institutional investors to the Singapore bourse.
These could include companies operating in sectors such as cloud computing, e-commerce (Alibaba), environmental/pollution control, factory automation, infrastructure plays in emerging markets and renewable energy.
SGX's tie-ups with regional exchanges are a good start but it should forget about secondary listings of US and European stocks as trading liquidity is very poor and investors tend to buy such stocks in their primary listing market due to differences in trading hours.
Issues to be addressed
1. Declining commission income for the securities intermediaries will hurt SGX in the long-run
Brokerage commissions for securities intermediaries have been on a downtrend since the liberalisation of the industry over a decade ago especially with the advent of Internet trading and with a double whammy from lacklustre trading volumes, many remisiers have been calling it a day as their commissions dwindle.
http://www.businesstimes.com.sg/stocks/s...e-dries-up
SGX needs to address the declining trend of commission income as it has been proven that lowering brokerage rates does not result in higher market volumes.
Similar to what agents are to insurance companies, remisiers represent the front-line sales force for SGX in attracting new clients and servicing existing clients.
With remisiers being forced to leave the industry due to unsustainable low commissions, it is no wonder that trading volumes are dwindling.
Imagine what the growth of the insurance industry would be like without insurance agents!
Unlike SGX which is a monopoly with the ability to increase its income by revising its annual listing fees (the most recent revision for Mainboard companies was on 1 January 2014), securities intermediaries have no such means available to them to boost their income.
SGX also needs to address what should be the floor for brokerage rates when the standard board lot size is eventually reduced to 1 unit.
It does not make financial sense for an investor to buy 100 units of a stock trading at S$0.20 i.e. S$20 with the current minimum brokerage rate of approximately S$25.
The reduction in standard board lot size may also lead to lower market volumes as investors buy in smaller quantities and will lead to lower income for the securities intermediaries.
2. Improve investor education to raise retail participation rates
SGX head of securities Nels Friets mentioned his desire to raise retail participation rates in equities investments.
Currently, the proportion of the population who make at least one trade every three months is at 8 per cent in Singapore, compared to 17 per cent in Australia and 24 per cent in Hong Kong.
He suggests that the reduction in standard board lot size will result in change in behaviour from trading pennies to buying and holding of the blue chips.
However, if all retail participants adopt a buy and hold strategy and engage in less trading, this will result in lower market volumes!
SGX should consider increasing its efforts to improve investor education about investing in equities as part of holding a diversified investment portfolio.
As mentioned earlier, the key is to increase the number of good quality companies listed on the SGX which will make investors comfortable with increasing their exposure to equities.
[/align]
Trading volumes suggest that the switch to full-day trading on the SGX has not increased volumes.
In fact, bourses with shorter trading hours such as Korea and Taiwan generate significantly higher trading volumes.
This is attributable to the depth of their financial markets and their strong niche in technology offerings.
SGX should improve the welfare of personnel working in securities intermediaries and restore the lunch break or shorten its trading hours.