Debate over stock tick size splits stakeholders

Singapore

THE Singapore Exchange (SGX) proposal to widen the tick for certain stocks has sparked a debate over whether the change will improve market liquidity or simply raise profits for a select group of traders.

As part of a number of proposed changes to the securities market structure in Singapore, SGX is considering whether to double the tick - the smallest amount within which a share price is allowed to move - for stocks in the S$1 to S$1.99 range, from half a cent to one cent.

SGX said that the wider tick could make it more viable for market making in a segment where there has been lower turnover and retail participation in recent years.

Adjusting the tick is however a delicate issue. A wider tick might make a market more attractive for market makers, but it also exacts a price on other investors for whom a larger of each trade value will be spent on crossing the spread between bids and offers.

Take for example a stock that is bid at S$1 and offered one tick higher at S$1.005. An investor who wants to buy a share at the current market must be willing to pay an additional half a cent, or 50 basis points, to "cross the spread".

If the tick is widened to one cent, the cost doubles to 100 basis points. A patient investor does not need to cross the spread, but that investor then assumes the risk of not being able to execute.

David Gerald, president of the Securities Investors Association (Singapore), or SIAS in short, said: "While the intention is to increase the level of retail participation - especially for the stocks in the S$1 to S$1.99 range - by widening the minimum bid spread, the downside of such an action is that it would also mean the retail investors would be paying more."

But bid-offer spreads that are too narrow can also make it hard for market makers, who try to make their money by getting in and out over one tick, to turn a profit.

Modern stock exchanges are generally advocates of frictionless markets and therefore try to reduce inefficiencies such as wide ticks. But in recent years, there has been a shift towards the view that if a market wants liquidity from market makers, it may well have to pay a price in the form of some inefficiency.

Already, the US is running a trial programme to widen the tick for certain stocks. Indonesia in 2016 also widened ticks.

The Securities Association of Singapore (SAS), a trade group that represents stock brokers, is urging SGX to go further than the current plan. SAS wants ticks to be widened for stocks that trade from S$0.50 to S$1.99, which it says will cover about 190 to 200 stocks - more than the 60 to 70 under SGX's proposal.

SGX's more constrained proposal "will have minimal impact to attract and sustain increase in trading volumes from the targeted market participants", SAS said in a written response to a public consultation by SGX. "Based on SAS members' retail experience, it is 'too few too little' syndrome to be effective."

The Society of Remisiers supports that move. "This will actually attract liquidity providers, and encourage the self traders," Society of Remisiers (Singapore) president Jimmy Ho said.

Mr Gerald, however, was not convinced. He said that SIAS was concerned about increased costs for investors as well as increased speculation in the affected counters.

"We want to improve quality and investibility of companies," Mr Gerald said. "Widening (the) tick, contra etcetera goes to churning the stocks, which in my view is about trading. If we want to build a segment of professional traders then it should be confined to a specific segment and they should be appropriately regulated and not for the entire market. Perhaps we should focus on developing a segment of proprietary traders to deepen the market instead."

On its part, SGX is spreading a message of give and take among all the stakeholders in Singapore's market.

"The public consultation has closed and we are heartened that most respondents considered the interests of the wider market segments instead of focusing on individual interest," SGX head of equities and fixed income Chew Sutat said.

"For any single market structure change to be effective, we believe it has to be complemented by collective industry efforts, including research on stocks and client engagement by stock brokers. The targeted price range was arrived at after a detailed data analysis and aims to provide more viable trading opportunities, taking into account total transaction costs."