Monday, July 27, 2009

Bursa Improves Tick Size?

Below is the article issued by Bursa Malaysia on the changes to Tick Size, my comments in purple:

Equity investment strategies take account of many factors, including tick sizes which are set by a stock exchange. Here is a primer on tick sizes and how investors benefit from a smaller value.

This educative article is in conjunction with the introduction of a smaller tick size which will be made available by Bursa Malaysia and is planned for implementation on Aug 3.

Equity investors rely a lot on research and information to forecast the potential price appreciation of a stock. This ranges from fundamental analysis of the company to a technical analysis of its historical price movements. There is also a little known indicator known as a spread that can be used by investors to gauge the near-term movement of a particular stock. A stock’s spread is closely influenced by a “tick size”.

Understanding Spreads. Every share that trades on the stock market has a best buy and a best sell price. The best buy price is the highest price in the order book placed by interested buyers for a specific share while the best sell price is the lowest price in the order book placed by interested sellers.

These two prices are determined by demand and supply, which can be seen as a negotiation process between two parties.

The spread is the difference between a share’s best buy and best sell price. The general belief is that a consistently large spread signals low volume for that respective stock.

On the other hand, a narrow spread can indicate that a transaction will occur soon. For example, a stock with a buy/sell price of RM10 and RM10.02 suggests that buyers and sellers are very close to making a trade. If the narrow spread continues, volume for the respective share is expected to be high. A wider spread means that greater changes in the share’s buy or sell price is needed before a transaction can conclude.


1) About bloody time.

2) Some who might worry that it now takes a lot more ticks to move a stock are barking up the wrong tree. They would say that for a stock to move from RM3.10 to RM3.20 in the past require only five ticks to be cleared, now it takes buyers to clear ten ticks. That is so silly - that is assuming that each tick has the SAME number of sellers, whether it is 1 sen or 2 sen??!! If today there were 100,000 shares on the sell side, and say the old system would have the 5 ticks with each having 20,000 shares to be sold.... are you telling me that just because you expand the 5 ticks to 10 ticks (same price range) that the sellers would be a lot more??? Its the same number of sellers but it will increase transaction because of narrower spreads.

3) The change will be most important for the RM3.00-RM5.00, followed by the RM5.00 to RM10.00. Many will think the RM5-10 will see greater impact, I tell you that won't be the case. Liquidity improvement will be most marked in counters that are a bit specky. Most shares above RM5 are already too steady. More vibrant activity will be seen in the RM3.00-RM5.00 range.

4) Tick sizes is only a very minor aspect of liquidity, there are still a lot more work to be done if genuine liquidity is to be generated. Just to cite a few: chopping the flimsy counters, speeding up PN17 process (if they cannot restructure or regularise within 4 months, delist them), raise the bar on the "quality" of companies allowed to be listed, push through to delist companies that has less than 3% of total paid up traded each month (each transgression gets 1 warning, more than 3 monthly warnings a year automatic delisting), transparency... more prosecution and implementation of regulatory processes... transgressors must be picked up and dealt with with immediacy, .. and possibly the most important factor... 'free up' the ringgit, allow it to be transactable overseas, no declare this, declare that ... I know BN would want to keep track of hot money flowing in and out for such a small economy like ours, but I believe there are other ways of policing... the current system takes too much "benefits" away from the markets.

p/s photos: Alan Dawa Doma

1 comment:

Chowpiao said...

Bursa with all their BRIGHT ideas!!! We'll see