Low liquidity not confined to just the local market

Business Times
Published July 11, 2011

By R SIVANITHY
SENIOR CORRESPONDENT


FOR about three months now, dealers and remisiers have been complaining about thinning liquidity and no interest from clients. There are some who describe current conditions as the worst they've ever experienced, while there are reports of dealing representatives coming in to work only after lunch because of the absence of any business. 'Even the institutional side isn't covering its costs,' said one dealer.


Combined with falling commissions and narrower bid-ask spreads which make it more difficult to trade intraday - and of course, full-day trading from Aug 1 - brokers are understandably worried about their future.

The first thing to note about all this is that the low volume of the past 2-3 months is very likely not confined to just the Singapore market. Granted, foreign money started withdrawing from local stocks sometime in the third or fourth week of January, ostensibly because of worries that not enough was being done to combat inflation, but this withdrawal hit all regional markets.

For example, a June 28 news report in Australia's Brisbane Times highlighted the plight of stockbrokers Down Under when it wrote of belt tightening as the phones stop ringing: 'Last week, listed stockbroker Wilson HTM Investment Group issued a warning to shareholders that it would lose up to A$5 million (S$6.6 million) in 2011, blaming weaker trading conditions as a key factor ... In the past few years, more than 20 brokers have either collapsed, nearly collapsed or merged. Most have culled staff or instigated hiring freezes.

'With thin volumes on the ASX, it is becoming a war of attrition in stockbroker land, with questions over who can survive the longest under the strain.'

Feedback from various market sources including fund managers is that roughly the same problems are being faced by brokers in other countries as well, with the logical conclusion that the bulk of daily volume is being generated by high-speed traders (who generally do not hold overnight positions), hedge funds, program traders and dealers trading on their own. On this latter point, one dealer said: 'If you don't play on your own, no way you can survive if you rely on client business.'

As noted earlier, the original reason for the outflow of money from stocks was inflation worry. But since then, this has been overtaken by European debt concerns, the US's supposed 'soft patch' and China's 'hard landing'.

In Europe, the recent Greek bailout may have brought some relief but as noted in last week's column, the 12 billion euros (S$20.9 billion) the country will receive will last only until the end of summer, after which another bailout will be needed. There's also Portugal and Ireland, whose debt spreads are almost at all-time highs, suggesting they are candidates for a bailout soon. Also a worry are Spain and Italy, which have much larger economies which are also heavily debt-laden.

As for the US stock market, it probably owes its recent bounce to its status as the relative 'safe haven' rather than the recent economic reports. The latter have been patchy and not very encouraging, culminating in Friday's dismal jobs report, which endorses the notion that pumping money into Wall Street doesn't really benefit the majority and that the 'soft patch' may well turn into a quagmire.

So it is that the week ahead will see the Straits Times Index react to European and US economic news, with sentiment supported by hopes of more bailout money from central banks. Meanwhile, the worldwide phenomenon of low liquidity looks set to continue.