Quest for livelier market drives SGX to reverse, tweak some rules

Industry players won a victory on Monday from the Singapore Exchange (SGX), which acceded to calls from bankers, brokers and remisiers to reverse or cut back on some recent rules and proposals.

In trying to boost market liquidity, SGX is seeking public feedback on its plans to:

  • Widen the tick size for stocks in the S$1.00 to S$1.99 range from 0.5 cent to one cent;
  • Introduce a mid-day trading break from noon to 1 pm; and
  • Raise the threshold at which trades trigger an "error trade" warning, also called the forced order range, from the current 20 bids to 30 bids in either direction.

Hoping to improve retail access to new listings and following an earlier consultation, SGX is also requiring that Mainboard new listings (with mandates awarded after May 2, 2017) allocate at least 5 per cent or S$50 million, whichever is lower, of their initial public offerings (IPOs) for public subscription.

The first IPO to be affected is not expected to launch until the second half of 2017.

The changes address issues that have been raised by industry players.

The tick size and lunch break proposals would reverse changes that SGX had imposed in 2011; the proposed minimum public allocation is lower than initial plans for a 10 per cent floor.

SGX has long tried to significantly increase liquidity in its securities market. Its two-month average daily turnover of S$1.2 billion (as at the end of last month) is about 30 per cent below the S$1.8 billion average over the same period in 2011.

A number of initiatives aimed at raising liquidity and market quality - continuous all-day trading, narrower ticks, smaller minimum board lots and a minimum trading price, just to name a few - have met opposition among many market participants.

Monday's announcements were SGX's signal that it is listening and willing to make accommodations.

The impact of changing tick sizes is especially uncertain. The theory goes that narrower tick sizes tend to reduce bid-ask spreads and volatility, which imply better efficiency and attractiveness to traders.

But those changes also make it harder for very short-term retail traders, who try to flip out of positions as quickly as possible and so want larger tick sizes that can cover trading costs.

SGX acknowledged that widening ticks could hurt some segments of the market, but sought to contain the impact by limiting the change to 67 companies whose share prices fall within S$1.00 and S$1.99.

The average daily turnover of those stocks have fallen by an unusually steep 32 per cent a year since July 2012, to S$90 million in the year ended June 2016.

Chew Sutat, SGX head of equities and fixed income, said: "The bottom line, really, is that efficiency may be lost for some participants, but we think a targeted approach on a S$1-to-S$2 range narrows it to only 60-odd stocks in the market ...

"We hope that for some of the shorter-term retail traders with a higher cost structure, the increased activity with that segment could overall increase and attract other institutional participants to come in as well."

But the Securities Association of Singapore (SAS) says that the tick adjustment "does not go far enough".

Association president Melinda Sam said: "The SAS feels it should cover securities from the $0.50-to-S$1.99 range, in order to see significant retail investor interest."

Aberdeen Asset Management Asia director Nicholas Hadow described the proposal, which he supports, as a matter of striking a balance.

"Over the last few years, SGX has been trying to narrow spreads across the board to increase liquidity. It is now moving to a much finer level of calibration."

CIMB Securities chief executive Carol Fong said institutional players now constitute about 60 per cent of the market, compared to 10 per cent of day traders. Wider ticks could improve retail presence in the market, she said.

"The problems we've been facing the last few years has been due to a lack of retail participation," she said.

The proposed reintroduction of the lunch break also earned a warm welcome from a number of market players, not least of which was the Society of Remisiers, which had made it a key issue since SGX moved to continuous all-day trading in 2011.

Society president Jimmy Ho said: "We miss doing entertainment and strategising with clients during lunch time, and most important, you and the client get to eat ... I think it's a good U-turn in the sense that it shows the adaptability of the exchange in handling problems."

The old 12.30pm-to-2pm lunch break was removed partly to reduce "gap risk" - the potential for large losses when traders are unable to react to major market events in Singapore and in other regional markets during the trading break.

Under SGX's proposal, the new lunch break from noon to 1pm will coincide with breaks in Hong Kong and China, but still allow trading overlaps with Australia, India, Japan, Thailand, Taiwan and the United Kingdom.

The proposed break also matches the period when trading on SGX is thinnest - only about 5.1 per cent of daily turnover last year occurred during that hour.

SGX's Mr Chew said: "After having considered a lot of feedback from different participants, we found that we could still establish that continuity, that relevance, while coming up with the investor-protection measures."

Beyond trading-related issues, SGX also announced that it will require a 5 per cent minimum allocation in Mainboard IPOs for public subscription, with unsubscribed shares in the public tranche eligible for reallocation to other tranches.

The floor, lower than an initial proposal for 10 per cent, matches the historical average allocation. Mr Chew said that, after receiving feedback, the exchange decided that 5 per cent would not overly burden issuers, especially when interest is low in weak market conditions.

David Gerald, president of the Securities Investors Association (Singapore) (Sias), said that the investor advocacy group had been hoping for 10 per cent, but accepted that some floor was better than none.

"Let's see how the 5 per cent goes," he said. "If the demand is more, well, SGX has listened to the remisiers on the lunch break, I'm sure they will listen to Sias as well."

This article was first published on Mar 9, 2017.
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