SGX acts to curb manipulation
It plans to implement new computation method for equilibrium prices
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It plans to implement new computation method for equilibrium prices
By JAMIE LEE
23 July 2011
The Singapore Exchange (SGX) plans to change the way it calculates equilibrium prices that are used at the end of the pre-opening and pre-closing routines, as well as a trading halt, to limit market manipulation.
The equilibrium price refers to the single price that orders at the end of these events are matched at. This is currently calculated by using the average price that is rounded off to the last traded price using a computer programme, or an algorithm.
‘By using an average price, the current algorithm may be susceptible to extreme or even manipulative orders entered during that session,’ SGX said in a consultation paper yesterday.
The new computation method would now look mainly at two factors: the largest tradable volume and the lowest imbalance. The latter is the net difference between the cumulative bid volume and the cumulative ask volume.
‘The new algorithm would result in a price that is a better reflection of the market because the algorithm’s parameters take better account of the forces of supply and demand,’ SGX said. It added that in most cases, the new algo will yield the same equilibrium price as the current algo.
The largest tradable volume refers to the point where the demand for shares can be matched by the supply of shares.
For example, a stock at the price of $3.75 could have a cumulative bid volume of 340, and a cumulative ask volume of 10. The maximum volume that can be matched is 10.
If the highest tradable volume occurs at more than one price, the algo will then take the price at which the imbalance is at its smallest.
When the two conditions are fulfilled, but at more than one price, the algo will then take market pressure into account.
For example, if there is buying pressure - where the cumulative bid volume is greater than the cumulative offer volume - the algo will take the highest price of the group as the equilibrium price. If there is no market pressure - where total bid volume equals total offer volume - the algo will take the price that is the closest to the last traded price.
The algo will be applied during the pre-open period from 8.30am to 8.59am, and the pre-close session from 5.01pm to 5.05pm. Created in 2000, these pre-open and pre-close sessions are used to electronically match orders that were not executed during trading hours.
SGX intends to implement this before the end of the year.