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Cai Jin

Time for SGX to relook its trading structure?

Useful to see if further changes to board lot sizes, bid-offer spread can boost retail participation

For almost a month now, daily stock turnover has climbed back to the $1 billion-plus level.

This is a boon for stock dealers, following one of the quietest periods for the local stock market in years.

In fact, interest was so lacklustre that as recently as early last month, overall stock market turnover fell to a mere $626 million on one day.

Transaction levels this low are usually seen only on festive occasions such as Christmas Eve, when the market opens for half a day.

Still, one big question at the back of stock dealers' minds is whether this renewed investor interest in the stock market is sustainable.

Singapore Exchange data shows that turnover velocity on the local bourse is about 35 to 40 per cent in recent months. This is a far cry from other major stock markets such as New York where turnover velocity is 165 per cent. Tokyo is also much higher, with a turnover velocity of 113 per cent, and even Hong Kong has a turnover velocity of 65 per cent.

They understand that a vital attribute of any market is the ability to buy or sell shares easily. They measure this by what is known as turnover velocity, which tracks how frequently a stock changes hands.

Singapore Exchange (SGX) data shows that turnover velocity on the local bourse is about 35 to 40 per cent in recent months.

This is a far cry from other major stock markets such as New York where turnover velocity is 165 per cent. Tokyo is also much higher, with a turnover velocity of 113 per cent, and even Hong Kong has a turnover velocity of 65 per cent.

To try to give a fillip to stock trading, the SGX has introduced a slew of measures.

One of the most significant changes was the move to cut the board lot size from 1,000 units to 100 units almost two years ago.

And if investors have to fork out a smaller sum to buy shares because of the smaller board lot sizes, it is also reasonable to assume that there should be an increase in trading activities as more of them are attracted to the stock market.

That does not seem to have panned out at all. Of course, there may be other reasons accounting for the lacklustre interest in the local stock market, but having smaller board lot sizes has not nudged turnover velocity in a significant way. True, reducing the board lot size has helped to push up investor penetration in heavyweight blue chips which had long been out of the reach of ordinary investors.

Take DBS Group Holdings. When the board lot size was 1,000 units, an investor would have to fork out about $16,400 just to purchase one lot of the lender's stock. But with the reduction of the board lot size to 100 units, his outlay is now just over $1,640 if he wishes to gain exposure to the stock.

As a result, ownership of DBS shares has shot up by 50 per cent in the past two years to more than 66,000 shareholders. This is mostly due to a big jump in the number of shareholders holding fewer than 1,000 shares.

There is one snag though. Ownership of shares in household names such as DBS is now much more widespread among retail investors, and this may have helped to boost trading interest in them. But this may have diverted investor interest away from the rest of the market and stifled trading of stocks that are priced considerably lower. These smaller stocks do not enjoy the attention blue chips get from other market participants such as fund managers.

So, what could have explained the dearth in investor interest in the broader stock market?

One big problem is that brokerage charges for retail investors have not fallen in tandem with the reduction in board lot sizes from 1,000 units to 100 units.

As it stands, most brokerage firms still charge around 0.25 per cent of the contract value, subject to a minimum transaction fee of $25 for each trade done online by their clients. For broker-assisted trades, the brokerage fee starts at a heftier $40 and can go to as high as 0.5 per cent of the contract value.

For retail investors, this makes Singapore an expensive market for stock transactions, even though the smaller lot size is supposed to give them an incentive to buy shares because of the smaller outlay involved. Instead, this has made them unwilling to venture into the stock market. Reader Ong Poh Seng wrote: "Does it make sense to trade in small lots of 100 shares in stocks that have stock prices as low as 30 cents a share? Financially, it does not because the transaction fees will wipe out the value of such small-value trades."

Related to high stock transaction cost is another problem: What happens if the purchase order you made is only partially filled?

To explain a partially fulfilled order, consider this example: Suppose you key in an order to buy 500 shares in a stock trading at $10. If your order is fulfilled, your transaction fee would work out to about $25, or 0.5 per cent of the contract value.

But if the stock turns out to be illiquid, and you end up buying only 100 shares, your transaction fee stays at $25. But in percentage terms, it would have worked out to be 2.5 per cent of the contract value, a hefty cost for a stock transaction.

Now, what happens if the stock is priced even more cheaply at, say, 30 cents? If a buyer manages to get only 100 shares of his purchase order, the $25 that he pays for his transaction will almost be equivalent to the $30 payment to be made on the share purchase.

With all these considerations in mind, it is not surprising to find retail investors avoiding stocks that are not actively traded.

It then becomes a chicken-and-egg situation. Because there is not much liquidity in these stocks, investors avoid them. This, in turn, leads to a further decrease in their trading activity and a further dampening of investors' appetite for their shares.

What can be done? It would be good if brokerages could be persuaded to reduce their transaction fees to accommodate the smaller board lot sizes, but there is only so much they can do, given the overheads they have to bear.

There is, however, one observation worth highlighting.

Five to six years ago, the turnover velocity in the local stock market was a healthy 50 to 60 per cent - comparable to markets such as Sydney and Hong Kong.

In the intervening period, changes were made to improve trading liquidity. These changes included reducing the board lot size to 100 units and cutting the bid-offer spread - the minimum difference between a buyer's bid and a seller's offer - for stocks priced below 20 cents to just 0.1 cent from 0.5 cent.

But the irony is that despite the changes, turnover velocity in the local stock market has fallen.

Unlike New York or London where retail participation is minuscule and stock trading is dominated by high-frequency traders and institutional investors, retail participation on the local stock market still accounts for up to one-quarter of daily trading, according to stock dealers.

In this light, surely it would be worthwhile for the SGX to take another look at its trading structure to examine if further adjustments need to be made to board lot sizes and the bid-offer spread to encourage retail participation.

Food for thought.

A version of this article appeared in the print edition of The Straits Times on November 21, 2016, with the headline 'Time for SGX to relook its trading structure?'. Print Edition | Subscribe