Response to feedback on consultation paper Changes to minimum bid size, forced order range and trading hours for the securities market 18 July 2017 Singapore Exchange
Contents I Introduction... 1 1 Background... 1 2 Summary of SGX s responses... 1 II SGX s responses to feedback received... 2 1 Changes to minimum bid size... 2 2 Changes to forced order range... 3 3 Changes to trading hours for the securities market... 3 III Implementation of changes... 5 1 Implementation of Changes... 5 Appendix 1 Respondents to consultation paper... 6 ii
I Introduction 1 Background 1.1 On 8 March 2017, the Singapore Exchange Limited ( SGX ) issued a public consultation entitled Proposed changes to minimum bid size, forced order range and trading hours for the securities market. 1.2 In the consultation, SGX sought feedback on its proposals to: (a) (b) (c) Increase the minimum bid size ( MBS ) for all securities (excluding preference shares, structured warrants, exchange traded funds, exchange traded notes, debentures, bonds and loan stocks) and futures contracts 1 trading in the $1.00 to $1.99 price range from the current $0.005 to $0.01. The proposal seeks to boost the attractiveness of the price range to retail short term traders, as suggested by preliminary market feedback, so as to promote a more balanced mix of participants in that price range. Widen the forced order range ( FOR ) from the current +/-20 ticks to +/-30 ticks for all securities (excluding preference shares, exchange traded funds, exchange traded notes, debentures, bonds and loan stocks), futures contracts and preference shares in the $1 price convention, and +/-1,000 ticks for preference shares in the $100 price convention. The proposal seeks to improve order entry efficiency, as suggested by preliminary market feedback. Introduce a mid-day trading break in the securities market from 1200h to 1300h. The proposal seeks to retain the benefits of continuous all-day trading, by maintaining significant overlap in trading hours with key markets in Asia, while addressing market feedback for shorter trading hours. 1.3 The consultation closed on 29 March 2017. A list of respondents can be found in Appendix 1. SGX would like to thank all respondents for their feedback. 2 Summary of SGX s responses 2.1 Changes to MBS. A significant number of respondents supported SGX s proposal on the grounds that it could generate more viable trading opportunities. Some of those respondents suggested that the wider MBS be extended to other price ranges as well, as having it just for the $1.00 to $1.99 price range would not be impactful enough. Yet others objected to any widening at all, citing, among other reasons, increased trading costs. Having carefully considered the diverse views provided, SGX will proceed with its proposal to widen MBS only in the $1.00 to $1.99 price range. 2.2 Changes to FOR. No respondent objected to the proposal. However, a few suggested changes to the design of the FOR, the removal of the FOR entirely and/or the removal of the fee to place orders outside the FOR ( FOR fee ). Given the support received and having considered all suggestions, SGX will proceed with its proposal to widen the FOR. 2.3 Changes to trading hours. There was significant support for the proposal and the rationale behind it. While there were a few concerns raised, mainly with regard to investors ability to trade and manage their risk during the break and lower trading volumes given the shorter hours, SGX 1 There are currently no futures contracts listed on SGX-ST. 1
considers them addressed and mitigated in its proposal. As such, SGX will proceed with its proposal. II SGX s responses to feedback received 1 Changes to minimum bid size Question 1: SGX seeks your views and comments on the proposed changes to minimum bid size. Feedback received on Question 1 1.1 SGX received feedback from 26 respondents. 1.2 A significant number of respondents supported SGX s proposal on the grounds that a wider MBS would result in a larger profit opportunity, attract more market participants and potentially generate more trading volume. 1.3 Some respondents, while supporting a wider MBS, said that the widening would not be impactful enough and should be extended to securities in the $0.50 to $0.99 price range as well. Recognising the possible negative impact of such widening however, they suggested that the widening be restricted only to stocks that are not components of the Straits Times Index ( STI ). 1.4 Respondents who objected to any widening of the MBS were mainly concerned about the increase in trading costs resulting from a wider MBS. That concern was also shared by some who supported the proposal, and these therefore cautioned that there should be no further widening beyond the proposed price range. 1.5 Other respondents that did not support SGX s proposal were doubtful that a widening of MBS would stimulate trading activity. One said that many of the securities in the relevant price range have inherently lower volatility and hence a wider MBS may not increase liquidity. Another said that any MBS change in the relevant price range might simply redirect liquidity to another price segment without increasing overall liquidity. These respondents suggested that SGX adopt a cautious approach and monitor the impact of the proposed change after implementation. SGX s response 1.6 SGX notes the differing views among the respondents. After careful consideration of all feedback received, SGX will proceed with its proposal to widen the MBS only for stocks between $1.00 and $1.99. 1.7 SGX believes that it is not feasible to widen the MBS in the $0.50 to $1.00 price range for all relevant securities except STI component stocks. A wider spread for non-sti stocks compared to STI stocks would increase trading costs for the former, and further discourage investors from considering non-sti stocks which already have relatively lower volumes. 1.8 The $1.00 to $1.99 price segment is the one that has shown the biggest decline in traded value and has the lowest level of retail participation in recent years. A wider MBS targeting this price range will, SGX believes, achieve an appropriate balance between the various competing interests of market participants. 2
1.9 SGX notes the view that the impact of the proposed change is uncertain and agrees that there can be no guarantee of outcome. As such, SGX will monitor the impact of the change post implementation, and consider adjustments as and when necessary. We would also reiterate our view that for the change to have the desired effect of increasing trading activity in the targeted price range, it would have to be complemented by collective industry efforts, including research on stocks and client engagement by brokers. 2 Changes to forced order range Question 2: SGX seeks your views and comments on the proposed changes to the forced order range. Feedback received on Question 2 2.1 SGX received feedback from 24 respondents. 2.2 Most of the respondents supported the proposal and none objected to it. 2.3 A few respondents however suggested changes to the design of the FOR (e.g., that it should be percentage based, widened further, or based on a different reference price) or that the FOR be removed. Their view was that the FOR, as designed, would not work well in certain specific circumstances or when trading certain products. For example, one respondent said that because spot gold is volatile, an FOR for gold exchange traded funds would hamper the entering of orders aligned to spot gold prices. One respondent also suggested that the FOR fee be removed. SGX s response 2.4 SGX s forced order key is an error prevention mechanism that alerts brokers whenever an order is entered at a price beyond the FOR. 2.5 The FOR is set at the exchange level and is a fixed number which applies to all transactions uniformly. Brokers can customise and put in place their own error prevention alerts to better suit their clients risk profile and trading preferences if the FOR is not appropriate for those clients. 2.6 SGX s FOR is meant to complement brokers own pre-trade controls. SGX understands however that there are currently brokers that solely rely on SGX s FOR as their only form of error prevention control. SGX will review the calibration of the FOR and consider its removal altogether as the industry matures and brokers cease reliance on exchange-level checks. 2.7 As for the FOR fee, it increases the likelihood of a trader giving due consideration before forcing an order through at a price beyond the FOR. This makes the FOR more effective as an error prevention alert. In addition, there is a cost to SGX in maintaining an error prevention alert as a functionality of the trading engine. The FOR fee goes towards defraying that cost. As such, SGX does not propose to remove the fee. 3 Changes to trading hours for the securities market Question 3: SGX seeks your views and comments on the proposed shortening of trading hours through a midday trading break from 1200h to 1300h. 3
Feedback received on Question 3 3.1 SGX received feedback from 34 respondents. 3.2 There was significant support for the proposal and the rationale behind it. Among those that supported the proposal: (a) (b) (c) Trading representatives were strongly supportive, saying that a mid-day break would give them time to engage their clients and engage in other activities to support their business (although some suggested an even longer break than proposed). There was agreement with SGX s view that a mid-day break will not adversely affect trading volumes in any significant way. Some respondents also said that shorter trading hours may in fact result in higher trading velocity and a concentration of liquidity which would make price discovery easier. It was agreed that the proposed break will have little impact on risk management, specifically, that gap risks were not a concern as they materialise only briefly and very occasionally, and risk hedging will not be affected. 3.3 A few concerns were raised nonetheless. Those that objected to the proposal said that: (a) (b) (c) A mid-day break would coincide with the lunch hour which is the only time during which many full-time workers can trade. The proposed break would affect risk management, specifically, it would affect the ability to hedge other Asian markets, introduce price-gap risks and make it difficult to trade SIMSCI futures during the time of the break. Shorter trading hours would reduce trading turnover. 3.4 Other feedback given included comments that (a) shorter trading hours, while welcomed, would be better achieved through a later start and earlier end to the trading day instead; and (b) the introduction of a mid-day break may appear regressive. SGX s response 3.5 Given the significant support expressed for the proposal, SGX will proceed with its proposal. 3.6 With regard the concerns raised, SGX believes that its proposal addresses and mitigates them. In particular: (a) (b) Concerns about investors ability to trade during their lunch hour are mitigated by the fact that investors will continue to be able to manage their orders during the break. An IEP (i.e., the price at which orders that are in the order book would be executed if matching were to occur at that point) would also be published throughout the break which would give investors an indication of the market level at any point during the break. Concerns about the ability to hedge Asian markets are mitigated by the timing of the break corresponding with the trading break hours of key markets such as Hong Kong and China. Concerns about gap risk and the ability to trade SIMSCI futures are mitigated by participants being able to manage their orders and an IEP being published to facilitate price discovery during the break. 4
(c) Concerns about the potential negative impact of shorter trading hours on trading activity are mitigated by the fact that the break will take place from 12pm to 1pm which historical data suggest is a period of thin trading. For the period January to December 2016, trading during that time accounted for only 5.1% of the SDAV for the day. 3.7 With regard the other comments given, SGX does not believe it appropriate to end trading earlier or start trading later as we have received market feedback that we should avoid coinciding with the opening and closing of North Asian markets and should maintain overlap with early European hours. Further, SGX considers the mid-day break proposal more progressive than otherwise in addressing and balancing the diverse needs and interests of participants. As one respondent noted, in light of the issues and concerns of all the various stakeholders, having a lunch break that is aligned to regional markets is the best option. 3.8 SGX will monitor the impact of the change post implementation, and consider adjustments as and when necessary. III Implementation of changes 1 Implementation of Changes 1.1 The changes to MBS, FOR and trading hours for the securities market will be effective on 13 November 2017. 5
Appendix 1 Respondents to consultation paper 2 1. Asia Securities Industry & Financial Markets Association 2. Securities Association of Singapore 3. Securities Investors Association (Singapore) 4. Society of Remisiers 5. AIA Singapore Pte Ltd 6. Amundi Singapore Ltd 7. Asia Management Fund Pte Ltd 8. Bank of America Merrill Lynch 9. Bernstein LP 10. CLSA Singapore Pte Ltd 11. DBS Bank Ltd 12. Flow Traders Asia 13. Fullerton Fund Management Company Ltd 14. HSBC Securities (Singapore) Pte Limited 15. Instinet 16. Kit Trading 17. LMR Partners 18. Nuvest Capital Pte Ltd 19. OCBC Securities Pte Ltd 20. Schroders Investment Management 21. Societe Generale Corporate and Investment Banking 22. UBS Investment Bank 23. Virtu Financial 24. Ang Ming Hong 25. Aw Lionel 26. Chew Ngan Yong, Francis 27. Ing Faye 28. Koh Poh Hin 29. Lim Steven 30. Lin Ping Hoe 31. Ng Joo Kheong 32. Oh Ryan 33. Ong Wai Yin, Sandy 34. Quek Aik Wu 35. Quek Bek Choo, Jasmine ( Jasmine ); 36. Susastra Djajadi 37. Tan Lam Soon Alan 38. Tan Wei Wei 39. Teoh Yit Peng ( Teoh ); 40. War Affair aka Gary 2 Respondents who have requested not to be identified are not listed. 6
Singapore Exchange London Tokyo Beijing Hong Kong Mumbai 2 Shenton Way #02-02 SGX Centre 1 Singapore 068804 main: +65 6236 8888 sgx.com