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Turning over turnover velocity

These are tough times for the stock market in Singapore. Traders are struggling. The Singapore Exchange (SGX) asserts that market quality is stronger than a year ago, but nevertheless acknowledges that it would like better volumes (it probably wouldn't mind higher earnings as well).

There are many factors that contribute to market liquidity, but a common gauge, and one that SGX uses, is turnover velocity. Simply put, it is the annualised ratio of the traded value of shares to the market value of stocks. What that metric suggests is how much of the market is actually in play, or how easy it is to buy or sell a security.

But what gets counted and when can make a significant difference. SGX's reported turnover velocity tracks only primary listings. If you count the entire market, including secondary listings, the number is quite different. Also, the industry standard uses end-of-period market capitalisation, which could be skewed; if you think about it, in a down market, the end-of-period market cap will be lower, giving a higher velocity even though most of the trades may have occurred at higher prices.

Based on data kindly provided by SGX, the market operator's reported velocity was higher than entire-market calculations of velocity by as much as 12 percentage points in certain quarters since July 2006.

All of that technical nitpicking notwithstanding, in general the numbers all point to turnover velocity being near to multi-year lows this year. But even that statistic has to be taken with a pinch of salt.

To begin with, recall that velocity can be affected not just by turnover, but also by market cap. In a down market like in 2007 to 2008, market cap fell sharply, leading to a spike in velocity. Of course, that's not really how investors want velocity to be increased.

Volumes and turnover are also not the only indicator of market quality, as SGX is taking pains to explain to anyone who will listen. The regulators have introduced and are introducing a wave of rules changes aimed at protecting investors. Circuit breakers, which was a popular demand by advocacy groups like the Securities Investors Association of Singapore, are now in place, for example. The move to reduce minimum board lots is on the way and widely praised as a step in the right direction.

SGX also asserts that quality issuers are still able to comfortably raise capital in Singapore.

So if you look at all the various stakeholders in the markets (issuers and shareholders, not just traders), Singapore's stock market is moving in the right direction, SGX argues. And when the market finally turns and volumes begin to pick up again, all of those other measures of market quality will continue to benefit all stakeholders.

It is probably correct to say that a more holistic view is important when trying to assess the health of the market. And from a governance perspective, kudos to SGX for its long-term discipline on pushing through with certain necessary regulatory changes. Of course, in the short-term, some of that may be of little consolation to a trader or remisier struggling with falling commissions.