Bursa KLSE effective 3 Aug 2009 ... Its Implications!

1. NEW TICK SIZES EFFECTIVE 3 AUG 2009

Bursa Malaysia’s revised tick size structure, which will see a smaller tick size, and is planned for implementation on Monday, 3 August 2009.The tick size is the minimum price variation between the buy and sell price for a stock. The tick size is reduced in line with the current practice by global developed markets and more importantly, to create market depth, enable price discovery and boost liquidity in the local equities market.

The tables below describe the new tick size structure to be adopted by Bursa Securities.

TABLE I - New Tick Sizes for Securities Traded and Quoted On Bursa

Price Range Tick Size (Sen)
Below RM1.00 0.5
RM1.00 up to RM9.99 1
RM10.00 up to RM99.98 2
RM100.00 above 10

For bonds, debentures, loan securities, warrants and call warrants, the minimum bid structure will have the same minimum trading spreads as for shares.

The Implications …

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.

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. A wider spread means that greater changes in the share’s buy or sell price is needed before a transaction can conclude.

Impact Of A Smaller Tick Size
A stock’s tick size is important as it is the minimum incremental movement in the price of a stock. A reduction in tick sizes by Bursa has several implications for retail investors.

Small tick sizes can lead to narrower spreads for a stock.

The perception that more ticks are needed for investors to cover the fixed brokerage cost for higher priced securities is not necessarily true because a smaller tick size does not mean that the price of a stock must move tick by tick. Price movements are determined by supply and demand, not tick sizes.

Short term investors can unwind their positions easily with smaller tick sizes.

Smaller spreads can increase trading opportunities and this improves liquidity.

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.

Tick Sizes in a Spread.
The magnitude of a stock spread is influenced by the tick size or the minimum tick size structure. This refers to the smallest allowable price variation between the buy and sell price of a stock. The spread of a share can narrow if the tick size is reduced.

In the past few years, many global stock exchanges reduced their permitted tick size as this initiative was found to boost liquidity and efficiency to the capital market as a whole.

The reduction of tick size is expected to attract more trading volume due to improved opportunities as investors now will have more choice of entering or exiting the market just by smaller trading ticks. In short, this reduction of tick sizes will enable price discovery, leading to a positive impact on market liquidity.

In respect to the bidding price for buying-in, the exchange will retain the 10 ticks. Arising from this, the buying-in price will be based on the current tick sizes instead of the new tick sizes to ensure that the buying-in price is attractive to potential sellers.


2. No more Second Board. A Unified Main & Second Board call Main Board.

Bursa Malaysia’s new board structure is expected to position the local bourse as a competitive capital-raising destination for both local and foreign companies.

Bursa Malaysia's current Main and Second Boards will be streamlined into a single unified board to be called Main Market and the revamped Mesdaq, which will cater companies from all sectors, will be known as "ACE Market".

The reforms are part of the new fund-raising framework to create an efficient access to capital and investments and transform Bursa Malaysia into a more attractive platform and foreign companies. Along with the new structure, there is also a significant shift in the regulatory approach with regards to listings and equity fund-raisings.

This new approach to regulation recognises a new environment in terms of diversity of investors, issuers and instruments, and is premised on stronger regulatory capabilities with more diligent surveillance of the market and greater reliance on enforcement.

Under the new Equity Guidelines, companies seeking listing under the profit track record test must have an uninterrupted aggregate net profit of at least RM20 million over the past three to five years, with a minimum net profit of RM6 million prior to listing.

However, applicants wishing to list under the market capitalisation test must have a minimum market capitalisation of RM500 million, with no prescribed minimum profit requirement.

The Equity Guidelines would include a framework for the listing of Special Purpose Acquisition Companies (SPACs). SPACs are companies with no operations that go public with the intention of merging with or acquiring operating companies or businesses with the proceeds of their IPO.

Under the new framework, the approval time for listing by SC will be reduced from the current minimum of 74 working days to 60 days.

Under the new framework, the SC's approval under section 212 of the Capital Market and Services Act will only be required for Initial Public Offerings, secondary listings and cross listings and transfer of listings from ACE market to Main Market.


3. Implementation Of New Trading Halt Rules …
Click here: tradinghalt_PO_circular

The Implications …
Bursa Malaysia is shortening the trading halt of stocks for the purpose of disseminating material announcements by listed companies will be shortened to one hour from one trading session currently.

The shorter trading halt ruling as "this will benefit listed companies as there will only be a minimal disruption of their securities from being traded".

Investors would also benefit from more trading opportunities as the suspension hours are significantly reduced.

A trading halt refers to a temporary halt in the trading of listed securities upon the release of information that has material effect on the price of the securities.

A trading halt when making material disclosure is important to enable investors adequate time to evaluate the company's announcements and make informed investment decisions.

Shortening of the halt period will enhance market efficiency as trading interruption is kept to the minimum, and both the issuer and investor will benefit from being able to trade with minimal interruptions.

The new rule is positive for the market as it allows information to come out earlier in the day "before speculation takes it to another level".

Currently (Before Aug 3), Bursa Malaysia requires listed companies to make material disclosures to the exchange and these announcements are posted on Bursa Malaysia's website, ensuring investors have continuous access to corporate information.

Meanwhile industry observers have mixed views on a new rule that shortens the trading halt of stocks for material company announcements to just one hour from a whole trading session currently.

While it is a good move and in keeping with practices in some of the more developed markets, many are also concerned that the shorter window for trades to resume may not be enough for investors to fully digest and comprehend the announcements, especially complicated ones.

The stock exchange imposes trading halts when companies release information that could have an effect on their share price. This temporary suspension is meant to give investors adequate time to evaluate the information and make informed investment decisions. With less time to digest and understand the info, investors may be too hasty in their decisions, miscalculate, and lose money in the process.

The onus will now be on the listed company to ensure that it gives out more comprehensive information that can be easily understood by investors.

It is believed that the shorter trading halt may benefit institutional investors more than it will retail ones. This is because with just a one-hour window for investors to take in a company's announcement before trade resumes, there is a chance retail investors may have missed out on the announcement altogether. Institutional investors, however, are constantly monitoring the market for material announcements and are likely to be able to react to such information faster.

Still, some developed markets have even shorter trading halts for material disclosures. Singapore practises a half-hour trading halt and Australia, between 10 minutes and 15 minutes. Hong Kong, however, halts the stock for one trading session, similar to the current practice in Malaysia.