Image by bransorem via FlickrThe Philippine Stock Exchange (PSE) made a giant leap into the 20th century last week with the unveiling of the New Trading System. It is really only the 20th century since global stock markets, both big and small, have been using a trading system that could process several different kinds of orders for decades.Unfortunately, the system was and still is to a certain extent, subject to glitches and buggy behavior. But overall, the improvements will have many long-term positives that will soon outweigh any temporary inconveniences.
However, if you are a long-time trader on the PSE, be prepared for some fundamental changes in the way the trading is conducted and what you can expect from trading.
Aside from the changes in the kinds of orders you can now place on the exchange, the most fundamental and significant change from a trader’s and investor’s perspective is the change in the size of the minimum fluctuation.
Every stock exchange determines the minimum price change that can be affected for each individual trade. Thirty-five years ago when I started on the New York Stock Exchange, prices were quoted in “eighths” of a point regardless of the price, large or small, of the stock. One-eighth was equal to 12.5 US cents. Therefore, the minimum price fluctuation was 12.5 cents whether the stock price was $5 or $500. Since then, the exchange has made some minor changes, including reducing the minimum fluctuation or “tick” to 6.25 cents.
The minimum fluctuation of share on the PSE was based on the price of the stock. The lower the price, the lower the amount of the minimum fluctuation. Yet, the minimum was actually quite large in comparison to other exchanges. With some issues on the PSE, the minimum tick was equal to several percent of the underlying stock price. This created a day trader’s dream. A trader could buy the stock and the price would only have to move three fluctuations, which is not very much, and be a the breakeven point if he chose to sell.
The problem with having a large minimum fluctuation price is that it creates high volatility in the price of the stock. It was not uncommon on the PSE to see price fluctuations of 4 percent or 5 percent up and then 4 percent or 5 percent down from the previous closing price. But again, this is somewhat to the benefit of traders who want to trade small price movements. For longer-term investors wanting to get a better price, it was slightly advantageous also as there was always a good chance that even though the price might have run up in the early part of the day, short- term profit-taking might bring the price right back to the opening level.
The old system was also good for stock-price manipulators. For many of the second line and less frequently traded issues, it did not take much money to buy and move prices higher by 10 percent or 15 percent. But with the new system, things have changed.
Under the old system, the minimum fluctuation for Philippine Long Distance Telephone (TEL) was P5. Based on a price of P2,400, that amounted to a 0.21-percent fluctuation. Now the minimum is P2 or a 0.080-percent fluctuation. Now that might not seem like a big deal but it is. Here is why.
Based on the positing of orders on TEL at 10 a.m. yesterday, it would have taken P30 million of buying to advance the stock P6 or 0.25 percent. Previously, that would have been just one fluctuation that might have taken only a few hundred thousand pesos of buying for the same amount of price movement.
For other issues, the change is very significant. Ayala Corp. (AC) used to trade in P2.50 increments. Now it is only P0.20. Yesterday AC needed P9.8 million of purchases to move the stock P2. Before, that might have been the same price movement for less than P100, 000.
Metrobank (MBT) with a price of P60 now trades in P0.05 fluctuations from a previous of P0.50. MBT needed P8.4 million of buying for the price to go up P0.65.
Yesterday TEL traded P177 million and went up P10, or 0.41 percent. MBT traded P126 and advanced P0.15, or 0.25 percent.
Although the PSE had net buying yesterday of over P250 million, the index advanced only 0.83 points.
Because this is a major and fundamental change in the way business is conducted on the exchange, it is going to take some time to adjust to the new system. Further, the PSE is going to have to make equally significant changes to the way the PSE index is calculated. I doubt if they have even thought about this issue. The index must be recalculated with a new formula to reflect the decrease in volatility. Now, a 100-percent point movement in the index would require as much peso volume on the upside as nearly a 1,000-point move required in the past.
Decreasing the amount of volatility in the stock market is not necessarily a bad thing. However, for individual stocks the new system will distort the price based on the amount of money coming into the shares. What we may see over the next months is companies splitting the number of shares to reduce the price. The lower the price of the stock, the higher the amount of price movement for the same amount of peso buying.
The new system was not equal across the price ranges. A stock trading at P1 still has the same fluctuation of P0.01. A P10 issue used to be P0.10 and is now P0.02. If I headed up a company that shares were trading at P10, I would split the stock 10 for 1 and lower the price to P1. That would make a lot of stock market sense.
Many more changes are coming. Guaranteed.
| John Mangun / Outside the Box |
| 02 AUGUST 2010 21:24 |
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