Local equities: improve the substance too, not just form

Published June 2, 2011
By R SIVANITHY

THERE is probably no better way to gauge what the future holds for retail stockmarket investors than through the prism of the humble remisier - the broker who would have with quiet resignation contemplated the Singapore Exchange's (SGX) announcement this week of its decision to narrow the bid-ask quotes for local equities.

First came deregulated commissions over the past decade, then the scrapping of the lunch break and the imposition of vastly increased fines for non-compliance with the rules. Now comes Tuesday's news, which would have been greeted with no small measure of dismay by many in the industry who see it as yet another sign that theirs is a sunset profession.

From SGX's point of view, it has little choice; equity markets everywhere are embracing high-speed computerised trading and since exchanges survive on liquidity, narrower spreads should lead to lower transaction costs and, ultimately, more active trading.

So much for the theory which, incidentally, also applies to small players. In practice, however, there is now a chance - perhaps not that insignificant - that the retail side of the business might suffer.

Small traders will find it much more difficult to make money from 'buying the bid and selling the offer' - or, in simpler terms, to profit from trading the spread - and, if so, could abandon the market altogether.

This also means that contra punting might in time become a thing of the past, though this may not necessarily be bad since it opens the door to faster settlement - possibly (t+1) - instead of the present (t+3), where 't' is the transaction day.

It also remains to be seen how proprietary traders will adapt to the increased demands placed on them by the smaller spreads and what the possible impact on liquidity this might be.

SGX, however, probably reckons that the boost from computerised, algorithmic trades will outweigh the business lost by the exit or curtailment of the retail punter. So from the perspective of its bottom line, there may not be too much harm done though whether this actually turns out to be the case remains to be seen.

But looking through the eyes of a remisier (or, if you prefer, the average retail investor), one can't help but get the feeling that all the initiatives the SGX has undertaken over the years - the current lowering of spreads included - are simply directed at the form of the exchange's business, with insufficient attention devoted to the substance.

For sure, form is important - having the world's fastest trading engine, for example, or the narrowest spreads are nice feathers to display in one's cap - but surely more must also be done to address the substance of the local equity product. How best to do this?

The obvious means is through offering all investors - not just retail - better-quality listings; and there can be little doubt that SGX - already painfully aware that such offerings are few and far between, and struggling to contain the damage from a scandal- wracked S-chip segment - is surely working feverishly to raise the quality of new listings.

Less obvious is the need to do more to deter and thereby prevent rigging and manipulation by big players.

Most (if not all) of the disciplinary action taken by the authorities over the past few years appears to have involved only retail brokers, whose profits from their illegal activities can reasonably be described as modest.

Many observers quite rightly believe that until regulators come down harder on the large high-speed traders or institutions which regularly rig or fix prices and/or the Straits Times Index presumably for considerable profit, a perception which is already taking root - that the field is slanted in favour of the big boys - will become firmly entrenched.

In improving the substance, however, form should not be neglected. Here, one recommendation is to examine the current practice of allowing companies to list via 100 per cent placement. Apart from the obvious complaint (when it comes to good companies) that the practice unfairly excludes retail investors and makes a mockery of a public float, anecdotal evidence from dealers is that allowing all the stock to be distributed privately facilitates rigging because the shares can be given to parties acting in concert.

Finally: a lesson from the US space agency Nasa - which in the early 1990s adopted the slogan 'faster, better, cheaper'. A series of high-profile disasters in the late '90s led to a scrapping of this mantra and a focus instead on quality.

Hopefully, no calamities will be needed for SGX to realise that there are times when cheaper and faster isn't necessarily better.