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SGX to Reduce Bid-Ask Spread

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The Singapore Exchange (SGX) has announced on 31 May 2011 that it is reducing the spread between bid and ask prices for shares trading. What are the implications for investors?

Revised Bid-Ask Spreads

From 4 Jul 2011, the following new bid-ask spreads will be in place and the actual spread depends on the price of the shares being traded.

For example, Neptune Orient Lines (which trades at about $1.83 at time of writing), had buy orders at $1.82 and sell orders at $1.83. This corresponds to an bid size of $0.01 (which is $1.83 minus $1.82)

From 4 Jul 2011, the buy-sell situation could look like this: $1.820/$1.825. Hence bid-size is $1.825 minus $1.820, which equals $0.005.

Shares that are priced at $2 and above would not have a more narrow bid size, but the range for "unforced orders" would be enlarged from +/- 10 bids to +/- 20bids. In the case of Singtel, at a last-done price of $3.20, before 4 Jul, investors would need to confirm via a "Forced Key" if they wish to places orders outside the range of $3.10 to $3.30. From 4 Jul, this window becomes $3.00 to $3.40.

The proposal is said by SGX to "lower costs for investors", achieving "S$1.7bil in annual savings, based on 2010 market turnover". In reality, the change does not save investors any money, but has the following impacts.

1. Improved Liquidity

With a smaller spread, investors would theoretically be less tempted to place orders on queue (and more willing to buy-up or sell-down to a queue), thereby leading to increased general market liquidity.

2. Reduced Visibility on Queues

Since only the queuing volumes for highest buy bid and the lowest sell bid would be visible, a small bid-size could make the buying/selling interest in a stock more opaque to investors who do not access to "market depth". "Market depth" is a tool that lets one see the volumes on queue at all bid prices, but is typically only available by subscription or to high-volume traders.

With a larger bid-size (as is the case prior to 4 Jul 2011) and the corresponding buildup in the buy-sell queues, the likelihood of a partially-filled order is lower when a large order is carried out.

3. High Frequency Trading

The move to a smaller bid-size is also apparently an attempt by SGX to encourage high-frequency (or algorithmic) trading, which is the use of computer programs by trading houses to rapidly take advantage of (or even arbitrage on) small differences in share prices.

In Apr 2011, SGX opened its new $70 million data centre equipped with high-speed trading systems.

Conclusion

A smaller bid-size is hardly intended to save investors money, as seemed to be implied by SGX's announcement on the change. Instead, investors mainly gain by having a more liquid market and spending less time waiting on the buy-sell queues. The biggest winner is undeniably SGX, which enjoys higher clearing fees which comes with higher trading volumes.

 

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Last Updated ( Tuesday, 31 May 2011 15:35 )  
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