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SGX to revise minimum trading price rule

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In one of my previous articles on Singapore Exchange’s minimum trading price (MTP) rule, I questioned whether the MTP framework will actually serve its intent of preventing market manipulations. Following that article, SGX recently proposed changes that will allow stocks with larger market capitalization to avoid the fate of being included in the watch list.

The MTP rule was implemented under SGX’s ex-CEO, Magnus Bocker’s era. Bocker’s tenure in SGX is generally viewed by many as negative because of the many unpopular changes he tried to implement. MTP was one of them, the other being the scrapping of the 90-minute lunch break to allow continuous trading.

Background of MTP

To his credit, Bocker did help to diversify SGX’s revenue stream through the expansion of derivative product offerings. However, he overlooked the importance of continuing to build the capital market portfolio for SGX. In addition, under his leadership, retail investors’ activities waned substantially. Of course it is not fair to put the entire blame on him for the lackluster market participation as economic climate plays a large part as well. But then again, as CEO, he did not implement any note-worthy initiatives to attract retail investors either.

SGX

It also did not help that many retail investors lost a lot of money after dabbling in Blumont, LionGold and Asiasons Capital. The three penny stocks surged to incredible levels within a short period of time and then dived spectacularly, prompting rumours of market manipulations. To prevent this sort of incident from happening again, SGX introduced the MTP in a bid to raise the quality of shares in the SGX.

From my point of view, current SGX CEO Loh Boon Chye needs to have a realistic and calibrated approach on this issue because the MTP rule alone will not magically leads to quality shares being traded in SGX. To have a reasonable outcome, SGX should establish the proper criteria framework and define the specific objectives for listed companies. Otherwise, it could lead to unnecessary costs for affected companies or even worse, achieve nothing meaningful at the end of the day.

Proposed changes to MTP

Among the key changes to be introduced to the MTP framework is the inclusion of market capitalization as an MTP entry criterion. SGX found that those companies with market capitalization of more than $40 million showed better liquidity and lower volatility than those with less than $40 million. Thus, SGX is proposing that a company is placed on the MTP list if:

  • The 6 month volume-weighted average price (VWAP) is $0.20
  • The 6 month average daily market capitalization is below $40 million

SGX is also proposing to review companies on a half-yearly interval instead of quarterly basis. This is to align with the 6 month look-back interval used to calculate the VWAP. Arising from these proposed changes, SGX will not be adding new issuers to the MTP list but those on the watch-list as at 1 March 2016 will remain on the list pending refinements to the framework.

My view on the MTP framework

The SGX watch-list consists of companies with financial issues and those not able to comply with MTP. In implementing MTP, SGX needs to consider inputs from various stakeholders as MTP may be seen as a blunt tool that could potentially damage the affected companies’ brand.

Very often, during bearish market condition, the companies’ business fundamentals may be sound but their shares could be trading at very low-level. Furthermore, what if another major market correction like the 2008 Great Financial Crisis was to happen again? A lot of stocks may be relegated to the MTP list and how would this framework serves to protect investors’ interest?

My view is that the MTP should be strapped altogether but SGX should maintain the watch-list for companies with financial difficulties. When it comes to price valuations, top-down interventions will not be effective and regulators should let the market force run its due course.

Thus, if SGX’s objective is to protect investor’s interest through the prevention of stock manipulation, then the emphasis should be to work with stakeholders (e.g. financial bloggers) to promote more coverage of penny stocks. Information is king and retail investors should have access to information to make informed decision.

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