New SGX Trading Rules: What You Need To Know

Foreword from ShareInvestor

This article “New SGX Trading Rules: What You Need To Know” by Grace Leong was first published in The Straits Times on 31 Aug 2014 and is reproduced in this blog in its entirety.

Regulations meant to curb speculation and level playing field

The fallout from last October’s penny stock crash has been immense, with billions of dollars lost, bitter recriminations flying, lawsuits launched and, now, a range of regulations that will affect investors of every stripe.

The sweeping regulations proposed by the Monetary Authority of Singapore and the Singapore Exchange (SGX) do not lack for ambition in their scope.

As well as aiming to make investing in blue chips more active and affordable, they are geared towards curbing excessive speculation and market manipulation, improving the quality of listings, boosting transparency, and levelling the playing field for small investors.

The fear among some observers is that the new rules could further sideline investors and dampen already-thin trading volumes.

But the immediate concern for retail investors is to work out how to navigate these measures, the first of which – reducing board lot sizes – takes effect from Jan 19 next year.

Board Lot Size Reduction

What is this?

This move cuts the minimum purchase “lot” of SGX-listed securities from 1,000 to 100 units.

That means you will be able to buy just 100 DBS shares, for example, instead of having to purchase a minimum of 1,000, which is the case currently. For example, to invest in pricier blue chips like DBS, which closed at $17.92 last Friday, you would need to put up $17,920 to buy 1,000 DBS shares. But under the new rule, you can buy 100 shares for $1,792.

How does it benefit investors?

This will make blue chips and index component stocks more affordable and help investors build portfolios with a smaller capital outlay.

Young investors with typically smaller cash reserves will have a wider range of equities to choose from, while longstanding investors can diversify further into blue chips.

For example, an investor could easily build an equity portfolio by buying 100 DBS shares, 200 Keppel Corp shares, 100 Jardine C&C shares and 300 Global Logistics Properties shares – all for an investable amount of $10,000.

Mr Vasu Menon, vice-president of wealth management in Singapore at OCBC Bank, said the change will allow investors with odd lots (100 shares and above) to sell the stock in the regular market instead of what is called the odd-lot market, where prices are at a discount to the market value.

Lot sizes of less than 100 shares will still have to be transacted in the odd-lot market.

“My sense is that investors here have become more sophisticated over the last few years, especially after the global financial crisis, and the decision to buy a stock depends on an individual’s assessment of a stock’s fundamentals and not just about its affordability,” he said.

Minimum Trading Price For Mainboard Shares

What is this?

Mainboard-listed firms will need to have a minimum trading price of 20 cents from March next year.

How does it benefit investors?

This rule is aimed at curbing speculation as low-priced securities may be more susceptible to market manipulation. This will help retail investors.

What should investors bear in mind?

In the short term, it may create uncertainty, as investors have to consider whether the stock may be consolidated to comply with the new rule.

Consolidation involves a firm reducing the number of its outstanding shares, which in turn boosts the price.

As a result, investors may become wary about investing in stocks below 20 cents or just above 20 cents, said Mr Menon.

To mitigate the impact of this rule, investors should keep in mind the possibility of a company undergoing share consolidation if its share price is below 20 cents, to avoid getting odd lots.

Otherwise, they may have to sell their odd lots in the odd-lot market, where prices tend to be below fair value and there is little liquidity, said remisier Alvin Yong.

For example, if you buy 50,000 shares at five cents apiece, and the firm does a share consolidation of 4:1 to get the value to the minimum trading price of 20 cents, you will be left with 12,500 shares.

Under the new rules, where the minimum lot size is now 100 instead of 1,000, there is no odd lot. But if you buy 51,000 shares of the same company at the five-cent price and it undergoes a share consolidation of 4:1, then your new shareholding will be 12,750. That leaves an odd lot of 50 shares.

If you already own shares in odd lots, you could buy more shares in the odd-lot market and round up the holding to a normal lot, Mr Yong said. Alternatively, you could sell the odd lots in the odd-lot market.

“Investors should take into consideration the likelihood of the company undergoing a share consolidation if the share price is below 20 cents. For instance, if the share price is 5.5 cents, then the share consolidation ratio will likely be 4:1. If it is 13 cents, then the ratio is likely to be 2:1,” added Mr Yong.

Move To Collateralised Trading

What is this?

From mid-2016, when SGX launches its new Post-Trade System, investors will have to post at least 5 per cent collateral on unsettled positions by the end of a trading session. That means if you want to buy 1,000 DBS shares costing $18,310, you will have to put up $915.50 as collateral in cash, stock or bank guarantee.

This replaces the current rules which allow contra trading, where investors are permitted to buy shares without cash upfront and resell them within three days, pocketing the profit or paying up the loss rather than the full sum.

How does it benefit investors?

It lowers the trading loss risk to brokers, that is, when their clients default. It also forces investors to do their own homework before buying into a stock and will discourage investors from jumping into the market on hearsay, as they will need to cough up at least 5 per cent collateral. 

What should investors bear in mind?

It may create more hassle for investors, who have to pre-fund their accounts (with cash, for example) to meet the requirement prior to trading, although this may not dampen retail participation if there is money to be made in the market, said Mr Alvin Tham, head of equity products, consumer banking group, at DBS Bank.

It is, however, possible for investors to use their stock portfolio as collateral. But that is contingent on them having already transferred shares to their broker under a nominee or subsidiary account.

“Plus, not every broker offers this service yet,” Mr Yong, the remisier, said.