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Trading shares: Do away with 1,000-unit lots

This story was first published in The Straits Times on April 15, 2013

WHEN facing up to challenges, the Singapore Exchange (SGX) can be counted on to meet them head on, quickly and decisively.

This applies to competition from other exchanges and trading pools, technological advances or product development.

The same goes for local stockbrokers. They have proved to be adept at harnessing technology in the trading of stocks and shares.

In the past, one had to make a trip to the broker's office to collect share scrip, and to make or receive payments.

No longer. There is no need to leave home to dabble in the stock market today. One can simply key in sell or buy orders online and make or receive payments electronically.

But for some reason, the exchange and its stockbroking members have been very cautious in addressing a perennial bugbear of retail investors - the difficulty of trading in non-standard board lots.

This is all the more surprising as other major bourses from Sydney to London do not require investors to buy shares in standard board lots.

In Singapore, a board lot usually means 1,000 units. There are some issues that trade in smaller board lot size due to their high absolute price.

For instance, Jardine Matheson Holdings shares, which ended at US$64.81 last Friday, are traded in board lots of 400 shares, while many of the preference shares of the local banks are denominated in multiples of 100, owing to their face value of $100 a share.

But most stocks are traded in multiples of 1,000.

In this respect, we have made little progress from the days when I was a teenager shuttling paper between home and the broker's office on behalf of my parents to make or take delivery of shares.

Understandably, one could not trade in odd lots with paper scrips. But 30 years on, the situation has improved only marginally.

In 2003, SGX introduced the unit share market that allowed trading in as few as one share, after studying the issue for more than a year.

On the face of it, the move closed a gap and allowed shareholders with odd lot shares arising from rights issues, bonus issues, stock splits and restructuring by companies to monetise these shares. In practice, it is an inefficient market that allows investors to sell the odd share only at a high cost.

The unit share market invariably offers a worse deal than the broader ready market, whether one is buying shares to round up an odd lot or getting rid of them. Due to the wide bid-ask spread, a buyer will often have to pay a higher price while a seller will have to offer a discount.

To make a simple analogy, trading in the unit share market is almost like dealing with dodgy retailers at Sim Lim Square. One expects to be ripped off.

The price difference between the unit share market and the ready market can be up to 15 per cent, depending on the liquidity of the stock.

To exacerbate matters, one also has to contend with a minimum commission, with most brokers charging $25 per contract for online trades.

This makes the trading of odd lots, other than the priciest issues, highly prohibitive.

The unit share market is also less transparent. As prices are not available online, price discovery is done through calling the dealer or remisier.

In summary, the unit share market will continue to be afflicted by these problems for as long as there is a parallel ready market.

SGX says it is currently considering implementing a reduced board lot size to make it easier for investors to invest in blue-chip stocks.

Clearly, the right move is to abolish the unit share market and reduce the board lot size to one share.

The counter argument to this proposal is that it could lead to more investors being saddled with the odd share.

Take, for example, a sell order for 12,000 shares. Under the one-share regime, the seller may find his order fulfilled partially. Say there are buyers for 11,881 shares. The seller ends up with 119 shares.

This is not a problem, if brokers agree to eliminate the minimum commission rate and allow commissions to be based entirely as a percentage of a contract value.

The seller can simply sell his shares at a lower price or another day, without suffering high trading costs or a deep discount.

Doing away with the minimum commission will understandably be unpopular with dealers and remisiers, who will fear their income will be hit. I have deep empathy for them as they have been grappling with ever thinning margins and falling client trades for many years.

So let the brokers work out a new commission structure. Raise it, if it is too low.

The brokers have shown some flexibility on this score.

Recently, Haw Par Corp made an arrangement with UOB Kay Hian and Phillip Securities to allow its shareholders to trade odd lot shares arising from a bonus issue for as little as $8 per contract in commission for a limited period.

In any case, the impact of abolishing the floor on commissions may be negligible.

Take the earlier example. The remisier who services the client who wanted to sell 12,000 shares will not get any less commission, if the client faces no additional financial hurdle in selling the remaining 119 shares.

The only difference is that the trades would be executed in two or more tranches instead of one.

To contain backroom costs, the SGX and brokers can do away with sending out physical notification of trades.

Rather than harming the industry, eliminating the 1,000-unit board lot market may give the stock market a lift by broadening retail participation as well as encouraging retail investors to invest in blue chips instead of the more risky penny stocks.

As it is, some blue chips are beyond the affordability of small investors.

For instance, how many can cough up the princely sum of $11,000, $20,000 or $51,000 respectively for a stake in Keppel Corp, United Overseas Bank or Jardine Cycle & Carriage?

A greater acceptance of odd lots by retail investors will go a long way towards deepening the stock market and enabling companies to be more innovative in raising funds from or rewarding shareholders.

It has been 10 years since the SGX introduced the unit share market to run parallel to the ready market. It is time to embrace it for the entire market.

dennis@sph.com.sg

This story was first published in The Straits Times on April 15, 2013

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