Minimum prices won't hurt overall market turnover

[SINGAPORE] Imposing a minimum share price on Mainboard-listed companies could put only a small dent in overall market turnover despite affecting a relatively higher percentage of stocks, according to an analysis by The Business Times.

Proposed changes to the framework for questioning unusual trading activity, however, could see "Trade with caution" alerts put out for most companies queried by the Singapore Exchange (SGX).

The Monetary Authority of Singapore (MAS) and SGX are currently seeking feedback on a comprehensive set of proposed rules changes for the securities markets. Among those are rules that could impose a minimum share price on Mainboard-listed companies.

Separate from the public consultation, SGX will also change its querying framework from March 3, allowing the market operator to issue a "Trade with caution" note for queried companies who cannot explain unusual trading in their shares.

The BT analysis sought to assess what the proposed changes could mean if they were applied to Singapore-listed companies right now.

For the minimum share price proposal, the possible impact was assessed for different minimum prices, from five cents to 30 cents. MAS and SGX have set initial guidance at 10 to 20 cents.

The analysis showed that as many as 337, or 43.3 per cent, of all the listed companies could be affected if the minimum share price was set at 30 cents.

The question was then asked, what do those affected companies contribute to the market?

In terms of market turnover, the impact appears to be small, ranging from 0.5 per cent to 6.1 per cent of total traded value for minimum share prices from 5-30 cents.

In terms of volatility, while the affected companies tend to have higher-than-average volatility, the dampening benefits of a minimum price appear to diminish with higher price hurdles.

At a minimum of five cents, the affected stocks would have average 30-day volatility of 113.6 per cent compared to the market mean of 64.7 per cent. At 30 cents, the affected stocks' volatility would average about 75.6 per cent.

In terms of trading queries, BT classified all the replies to trading queries over the past year into five categories: Not aware; always looking at deals; could be explained by a previous announcement; insider trades that have yet to be announced; and specific but undisclosed potential deals.

About 64 per cent of the replies made did not give specific reasons to explain their share prices, saying that they were not aware of any pertinent undisclosed information or that they were always looking at deals. Those will probably receive "Trade with caution" notices under the new regime.

The analysis is not perfect.

Constraints in obtaining data limited the analysis to closing prices over the two-week period to Feb 12, when the consult suggests that volume-weighted price will be observed over a 180-day period. The universe of stocks also differs depending on the source of the data. The BT analysis used SGX's end-of-day numbers and excluded depository receipts, derivatives and exchange-traded funds.

The BT analysis deviates slightly from official data, which were also limited because they were current only until Dec 31 and only showed the impact of minimum share prices of 10 and 20 cents.

MAS data showed that with the minimum share price set at 10 cents, 22 per cent of Mainboard-listed companies could be affected. BT's analysis was 25 per cent. Those companies had average volatility of 123.6 per cent, according to MAS. BT's analysis had volatility of 94 per cent.

With a minimum share price of 20 cents, MAS data showed 38 per cent of Mainboard-listed companies affected, compared to 42 per cent for BT. Average volatility for the MAS stocks was 100.7 per cent, compared to 83.1 per cent for BT.