Time for brokers to make bigger contribution to the revitalisation of the Singapore market

[SINGAPORE] When the Malaysian market was booming in the early 1990s, some small-time investors in Kuala Lumpur would informally pool their funds together to purchase shares.

Some of them told me that they formed these loose joint ventures because they didn’t have a lot of spare cash, while others said that they wanted to escape the hassle of having to open their own brokerage accounts. Teaming up with a few friends essentially reduced the frictions and ticket price of participating in the market.

This arrangement seemed to appeal to their human nature too.

Through close and constant engagement with their fellow investors, they gained the validation and courage they needed to continue trading in the market even as valuations became stretched. The ordinarily mundane act of executing a buy or sell order became rituals of social bonding.

Over the last couple of weeks, I’ve noticed parallels between those heady times and the ongoing implementation of the Equities Market Review Group’s recommendations to revitalise the local market.

On Jan 23, the Singapore Exchange Regulation (SGX RegCo) kicked off a public consultation on a proposal to reduce the standard board lot size for higher-priced instruments from the current 100 units. The proposed new board lot size will be 10 units for instruments priced above S$10 and up to S$100, and one unit for instruments priced above S$100.

Ng Yao Loong, SGX’s head of equities, said: “Share prices of some of our largest stocks have risen significantly in recent years, and about 30 per cent of trading activity now comes from stocks priced above $10. This is the segment where we want to enhance accessibility and broaden participation.”

He added: “By reducing the board lot size for these higher-priced stocks, we bring the minimum investment down from a few thousand dollars to just a few hundred – making such investments more within reach, especially for younger retail investors.”

Separately, on Jan 30, SGX RegCo began a public consultation on proposed rule changes to facilitate the broader use of broker custody accounts among retail investors for their SGX-listed securities.

It noted that many retail investors who maintain direct accounts with the Central Depository (CDP) also maintain broker custody accounts for their foreign-listed shares.

Ng said: “Investors can consolidate both their overseas and local portfolios with a single broker and tap into value-added services, such as customised insights and portfolio management.

“This streamlined experience supports more active investor engagement, while giving brokers greater ability to offer more value-added services and strengthen their client relationships.”

Reduced board lot size: Who benefits?

My sense is that there is broad support for the idea of reducing the standard board lot size for higher-priced stocks, as it is widely seen to be beneficial for the whole local market ecosystem.

Yet, I wonder if the move will encourage less-experienced retail investors to jump into the market at the wrong time. Many of the stocks that would qualify for the proposed reduction in board lot size have risen substantially over the past couple of years. Notably, DBS and Jardine Matheson are both currently trading at more than twice their lows in 2024.

To be sure, the reduced board lot size would also improve the accessibility of some high-priced blue-chip laggards – such as UOB. Yet, companies that see some advantage in having their shares trade at lower absolute prices can always propose a share split to achieve their objectives.

For instance, vehicle inspector Vicom announced a four-for-one share split in February 2020, when its shares were trading at approximately S$7.80.

In another case, glovemaker UG Healthcare announced a three-for-one share split in August 2020, in the wake of a surge in pandemic-driven demand for its products. Its shares reportedly closed at S$2.55 just before the split took effect.

Both companies said that their share splits would reduce the price of each board lot of their shares, and make their shares more attractive and accessible to investors. Neither company’s market value has improved since their share splits, though.

Vicom closed Friday (Jan 30) at S$1.65, while UG Healthcare closed at S$0.099.

The lesson here is perhaps that splitting a company’s shares – or reducing their standard board lot size – doesn’t change their underlying value. It is far more important that companies grow their businesses, work to enhance their profitability, and actively communicate with the market.

To be clear, I’m not arguing against the proposal to reduce the board lot size for higher-priced stocks. Yet, the broader investor participation and increased trading activity that might come about following the move may largely benefit SGX and the brokers.

This isn’t a bad thing. With their increased income, they might be in a position to improve their services and reduce their fees and commissions.

Broker custody accounts: New opportunity?

This brings me to the proposals to facilitate the broader use of broker custody accounts.

My sense is that many investors who currently maintain direct CDP accounts for their SGX-listed shares do not feel they are missing out on anything. To persuade them to switch to custody accounts, the brokers may have to work hard to gain their trust, and provide them with significant tangible incentives too.

SGX RegCo said last week that it intends to remove the current requirement for depository agents to hold SGX-listed securities for clients in segregated sub-accounts with the CDP. This will enable the depository agents to hold the securities in omnibus sub-accounts, which is in line with the practice in other markets.

A number of regulatory measures will also be introduced to support the wider adoption of the broker custody model, including requiring brokers and depository agents to facilitate the exercise of shareholder rights by their clients who are individuals.

Among other things, depository agents and brokers will be required to assist in disseminating notices of upcoming meetings and corporate action events; and submitting voting instructions on behalf of their clients.

In my view, these requirements are the bare minimum the brokers should offer their clients if they are serious about getting them to adopt custody accounts. In fact, alleviating the frictions that investors face in exercising their shareholder rights could be a key competitive advantage for the brokers.

For instance, the brokers could ensure that their platforms to submit voting instructions on behalf of clients with custody accounts offer a better user experience than if those clients chose to maintain direct CDP accounts – with useful alerts as well as links to information that might help them make better decisions.

Resolutions on the re-election of directors could perhaps be accompanied by information about other directorships they may hold, and the total fees they earned from all their appointments in the most recent financial year.

This could involve a significant amount of investment and management bandwidth, of course. Yet, the brokers are benefiting from surging trading volumes – thanks to companies unlocking value and repositioning their core businesses, and the Monetary Authority of Singapore unleashing its S$5 billion Equity Market Development Programme.

It’s time for them to begin making a bigger contribution to the revitalisation of the Singapore market.