Volatile penny stocks demonstrate need for minimum trading price
The penny stock volatility over the past few weeks was a
timely reminder of why the need exists for a minimum trading price on the
Singapore Exchange (SGX).
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Kenneth Lim
01 June 2016
The penny stock volatility over the past few weeks was a timely reminder of why the need exists for a minimum trading price on the Singapore Exchange (SGX).
At the very least, a minimum trading price will put a stop to the phenomenon of counters trading close to the minimum tick size of 0.1 Singapore cent and tripling or halving their value in a single session. The bigger benefit will be a mainboard with much less unwanted volatility and risk.
A number of mainboard penny counters have recently encountered elevated volatility. On May 16, of the 20 most heavily traded stocks on the Singapore Exchange by volume, eight were trading in ranges that represented at least 50 per cent of their day-before closing price. Of those, three were mainboard-listed, each of which had tripled its market value by the end of the day. Those outsized numbers need to be digested carefully - almost all of those counters were trading at or below one Singapore cent before that session.
For the companies that received a trading query by the Singapore Exchange that day, most reported little or nothing in terms of fundamentals to explain the sharp movement of the stocks. Traders expressed bewilderment about the activity in those stocks. Yet their share prices moved as if the value of those companies had changed dramatically overnight.
What actually drove that trading activity is unknown, but what is known is the concern that such unexplained, sharp price movements can create in the market.
Chatter about a repeat of the 2013 penny stock collapse re-emerged among traders, partly because a number of the big movers on May 16 - Annica Holdings, LionGold Corp, Attilan Group, Magnus Energy Group, Blumont Group, ISR Capital and Ipco International - were the same stocks that were either at the centre of that market crisis or were targets in the ensuing investigation.
There were also concerns about market manipulation, based on the fact that many of those stocks were trading at such low levels. Regardless of how much those concerns are founded in reality, they highlight a mathematical vulnerability in such low-priced stocks. At 0.1 Singapore cent, a stock would be trading at the minimum tick size, turning any movement in the stock into a massive percentage change; it would also have taken only S$556,654 to push a stock like Annica to the peak of the "Top Volumes" table on May 16.
SGX's newly implemented minimum trading price of 20 Singapore cents for a mainboard-listed stock is sound in that context. The minimum trading price would ensure that one tick size is never more than 2.5 per cent of any stock's price, limiting the potential for outsized price movements.
Critics have argued that the minimum trading price would generate a wave of delistings, which would leave a vacuum in the marketplace.
But arguments about lost liquidity are exaggerated. The 41 companies that were placed on a watch-list in March for failing to meet the minimum trading price accounted for just 0.3 per cent of the mainboard's total market capitalisation and 0.4 per cent of average daily turnover. Including companies that were granted an extension for meeting the minimum trading price, all of the companies that were trading below the minimum trading price in March accounted for just 1.1 per cent of the mainboard's market capitalisation and 1.5 per cent of daily turnover.
The companies at risk of being delisted because of the minimum trading price often grab headlines because of large volumes and large percentage price changes, but the truth is that as a whole they add little to the market in terms of liquidity. On the other hand, they disproportionately contribute significantly to real and perceived market risk. The market can afford to have some of those companies delisted.
But even with the minimum trading price in place, it may be prudent for SGX to begin anticipating the next challenge on this front.
Safeguards like the minimum trading price that have been created for the mainboard do not yet exist on Catalist, leaving the secondary board vulnerable to the same issues that have hit the more mature platform. SGX will need to figure out how to strike a balance between providing access to less mature companies and protecting investors on Catalist, and it should do so sooner rather than later.