Securities Market Quality Indicators...SGX The Asian Gateway 1 Introduction Welcome to the third...

Securities Market Quality Indicators

January 2012 – December 2012

SGX The Asian Gateway

Contents

Introduction ..................................................................................................................................... 1

Executive Summary ........................................................................................................................ 2

1. Trading Activity ...................................................................................................................... 3

1.1. Average Daily Value and Volume ........................................................................................... 3

1.2. Value/Volume Ratio and STI .................................................................................................. 5

1.3. Proportion of Married Trades.................................................................................................. 5

2. Liquidity ................................................................................................................................. 6

2.1. Quoted Bid-Ask Spread and Depth ........................................................................................ 6

2.2. Average Daily Total Quotes and Quote to Execution Ratio ..................................................... 7

2.3. Number of Trades and Average Trade Size............................................................................ 9

3. Volatility ............................................................................................................................... 10

3.1. Daily Average Price Volatility................................................................................................ 10

4. Trading costs ....................................................................................................................... 12

Definitions ..................................................................................................................................... 14

Contact Details ............................................................................................................................. 16

SGX The Asian Gateway 1

Introduction Welcome to the third edition of the SGX Securities Market Quality Indicators report. This report provides information on trading activity, liquidity, volatility and trading costs on the SGX securities market from January 2012 to December 2012.1 The report aims to provide a quantitative overview of trading activity and market dynamics to enable investors to better evaluate “market quality” and highlight trading opportunities available on SGX. The report considers these factors in the context of: i. Overall securities market

ii. Large-capitalisation stocks (30 Straits Times Index Components)

iii. Mid-capitalisation stocks (50 Straits Times Mid Cap Index Components)

iv. Small-capitalisation stocks (All Remaining Stocks)

This is a half-yearly publication prepared by SGX, in conjunction with the Capital Markets Cooperative Research Centre (CMCRC) in Australia. Esther Yoon Kyeong Lee from CMCRC conducted the analyses.

About Singapore Exchange

Singapore Exchange (SGX) is the Asian Gateway, connecting investors in search of Asian growth to corporate issuers in search of global capital. SGX represents the premier access point for managing Asian capital and investment exposure, and is Asia’s most internationalised exchange with more than 40% of companies listed on SGX originating outside of Singapore. SGX offers its clients Asia’s broadest span of equity index derivatives, uniquely centred on Asia’s three largest economies – China, India and Japan. In addition to offering a fully integrated value chain from trading and clearing, to settlement and depository services, SGX is also Asia’s pioneering central clearinghouse. Headquartered in Asia’s most globalised city, and centred within the AAA strength and stability of Singapore’s island nation, SGX is a peerless Asian counterparty for the clearing of financial and commodity products.

About Capital Markets Cooperative Research Centre

The Capital Markets Cooperative Research Centre (CMCRC) was formed in 2001 by a group of researchers, universities and industry partners, to bring together the best in innovative research and technology to the capital markets domain. Positioned as a bridge between the practical needs of capital markets and pioneering academic research, CMCRC was started under the auspices of the Federal Department of Education Science and Technology CRC program and is now run by the Department of Innovation, Industry, Science and Research of Australia.

1 To illustrate the longer trends in the market quality indicators, all graphs in this report show a period of twenty-four

months from January 2011 to December 2012.


Executive Summary Despite adverse conditions in the global economy, Singapore’s securities market remained resilient during the second half of 2012. The third quarter saw the Eurozone enter into its second recession since 2009, Japan’s economy contract by an annualised 3.5%, China’s growth slow to a thirteen-year low and fiscal uncertainty persist in the US. In Singapore, dampened by the performance of externally-oriented sectors including manufacturing and wholesale trade, the economy grew by 0.3% year-on-year. This period was characterised by negative real wage growth and high inflation. Despite the economic environment, the securities market showed signs of improvement, following a weak second quarter – trading activity increased, price impact cost improved and spreads narrowed. During the fourth quarter of 2012, the US economy contracted by an annual rate of 0.1%, recessionary conditions prevailed in the Eurozone but China’s growth regained momentum due to greater infrastructure spending and a relaxed monetary policy. The domestic economy grew by 1.1%2 year-on-year with the construction sector and the service producing industries experiencing positive growth. On the securities market, the performance of market quality indicators varied across size categories in this quarter. Over the past two years, SGX improved Singapore’s market microstructure through various initiatives – the minimum bid sizes for most securities were reduced on 4th July 2011, continuous all-day trading was introduced on 1st August 2011, the new Reach trading engine was implemented on August 2011 and the ASEAN trading link was launched on 18th September 2012. SGX will continue to roll out enhancements to our infrastructure and market microstructure to further improve the market for all participants.

2 This advanced GDP estimate for the fourth quarter of

2012 is computed largely from the first two months of the quarter (i.e. October and November 2012).

Key findings for the year are: Price volatility eased during the second

half of 2012 and was markedly lower than the first-half.

Price impact costs of large-cap and mid-cap stocks were sustained at levels significantly lower than pre-June 2011 levels, a likely result of market liquidity enhancing initiatives.

The value/volume ratio declined sharply during the final two months of 2012, indicating that the focus of trading moved back to penny stocks during this time.

A surge in married trades, reflecting M&A activities, saw its percentage of total securities market’s traded value escalate to 19.6% and 6.3% in the months of August 2012 and September 2012.


1. Trading Activity

1.1. Average Daily Value and Volume

Overall

Source: SGX

Daily traded value decreased substantially from $1.8 billion in February 2012 to $1 billion in June 2012. A recovery during the third quarter saw the market’s traded value return to the $1.4 billion level before moderately declining in the subsequent quarter. Compared to a monthly average of $1.4 billion during 2011, traded value was slightly lower at $1.3 billion in 2012.

Daily traded volume fell sharply in the second quarter from over 2.9 billion shares in April 2012 to 1.2 billion shares in June 2012. Over the following six months, there was a 79% improvement in volumes and during the final month of 2012, the number of shares traded totaled 2.2 billion. Compared to a monthly average of 1.2 billion shares during 2011, traded volume was considerably higher at 1.8 billion in 2012.

Large-Cap

Source: SGX

0.00

0.50

1.00

1.50

2.00

2.50

3.00

3.50

Valu

e/V

olu

me T

rad

ed

B

illio

ns

Average Daily Value Average Daily Volume

0.00

0.20

0.40

0.60

0.80

1.00

1.20

1.40

1.60

Valu

e/V

olu

me T

rad

ed

Billions



Mid-Cap

Source: SGX

Small-Cap

Source: SGX

Trading activity across all size categories improved in the third quarter, following a weak second quarter. From June 2012 to September 2012, there was a 24%, 28% and 104% increase in traded value and a 23%, 25% and 37% increase in traded volumes for large-cap, mid-cap and small-cap stocks, respectively.

During the final quarter of 2012, the average daily traded volume of small-cap stocks increased by 47%. The volumes of mid-cap stocks and large-cap stocks, however, remained stable at approximately 116 million and fluctuated between 229 million and 339 million, respectively. In this period, while the domestic economy experienced a growth of 1.1% year-on-year, the global economy remained largely subdued.

Trading activity, on average, was lower for large-cap stocks and greater for small-cap stocks in 2012 than in 2011. The change in the trading activity of mid-cap stocks, however, was less conclusive with traded volumes increase by 4% but traded value decrease by 7% over this period.

0.00

0.05

0.10

0.15

0.20

0.25

0.30

0.35

0.40

Valu

e/V

ou

me T

rad

ed

B

illions


0.00

0.50

1.00

1.50

2.00

2.50

3.00

Valu

e/V

olu

me T

rad

ed

B

illions



1.2. Value/Volume Ratio and STI

Overall

Source: SGX, Bloomberg

There was an evident increase in the value/volume ratio from 0.2 in April 2012 to 1.2 in November 2012, indicating a rise in the average price of stocks traded on the securities market. Subsequently, the focus of trading moved back to penny stocks and the ratio declined sharply to 0.3 in December 2012. Overall, the value/volume ratio decreased from an average of 1.2 in 2011 to 0.8 in 2012.

1.3. Proportion of Married Trades

Overall

Source: SGX

Married trades accounted for 1.3% to 4.2% of the total securities market’s traded volume over the last year. In the months of August 2012 and September 2012, a surge in married deals saw its percentage of total securities market’s traded value escalate to 19.6% and 6.2%, respectively. During this period, OCBC divested their shareholdings in Asia Pacific Breweries Ltd and Fraser and Neave Ltd. A comparison of 2012 and 2011 results show that married trades decreased by 0.9% and increased by 1.6% of the market’s traded volume and traded value, respectively.

0

500

1,000

1,500

2,000

2,500

3,000

3,500

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

1.8

Ind

ex L

evel

Valu

e/V

olu

me R

ati

o

Value / Volume Ratio STI

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

20%

% of Total Securities Market (Traded Volume) % of Total Securities Market (Traded Value)


2. Liquidity

2.1. Quoted Bid-Ask Spread and Depth

Large-Cap

Mid-Cap

Source: Reuters

Note: Singapore Exchange (SGX) reduced minimum bid sizes for certain categories of securities on 4 July 2011.

These changes had the impact of reducing the level of depth available at ’10 ticks’. The following table provides

the details of the changes to the minimum bid sizes.

0.00%

0.05%

0.10%

0.15%

0.20%

0.25%

0.30%

0.35%

0.40%

$0

$5

$10

$15

$20

$25

$30

Sp

read

Dep

th

Millions

10 Tick Depth Quoted Percentage Spread

0.00%

0.10%

0.20%

0.30%

0.40%

0.50%

0.60%

0.70%

0.80%

0.90%

$0

$2

$4

$6

$8

$10

$12

Sp

read

Dep

th

Millions

10 Tick Depth Quoted Percentage Spread


Market depth of large-cap stocks recovered during the third quarter of 2012, following a period of reduced levels. It improved significantly from $11 million in July 2012 to $23 million in October 2012 before moderately declining in the two months to December 2012. A year-on-year comparison shows that market depth was lower by an average of 11% during the last twelve months, as expected with the reduction in tick size.

Market depth of mid-cap stocks ranged between $3.8 million and $4.8 million in the second half of 2012, evidently higher than the $3.3 million levels of May 2012 and June 2012. However, despite signs of improvement, it remained markedly lower than pre-June 2011 levels. Overall, the market was thinner by an average of 19% in 2012 than in 2011, with a narrower tick.

2.2. Average Daily Total Quotes and Quote to Execution Ratio

Overall

Source: Reuters

Average daily total quotes ranged from a minimum of 123,000 in October to a maximum of

232,000 in June during 2012. In the second half of the year, there was an evident decrease in quoting activity. Consequently, for the first time since the implementation of the Reach trading engine in August 2011, the number of quotes was sustained at levels below 150,000. Despite this decrease, the average number of quotes was higher by 6% in 2012 than in 2011.

The quote/execution ratio remained flat throughout 2012, averaging at 1.83 and ranging between 1.7 and 1.9. Longer trends show that there was a permanent reduction from above 3.0 for the period leading up to July 2011 and that the ratio remained at lower levels until the end of 2012. That is, following the reduction of tick size, the quotes of investors have a higher chance of being executed.

3 A quote/execution ratio of 1.8 means that for every 180 quote submissions, 100 of those will result in trades.

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

0

50

100

150

200

250

Qu

ote

/Execu

tio

n R

ati

o

Nu

mb

er

of

Qu

ote

s

Thousands

Average Daily Total Quotes Quote / Execution Ratio


Large-Cap

Mid-Cap

Small-Cap

Source: Reuters

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

0

20

40

60

80

100

120

Qu

ote

/Execu

tio

n R

ati

o

Nu

mb

er

of

Qu

ote

s

Thousands


0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

0

10

20

30

40

50

60

70

Qu

ote

/Execu

tio

n R

ati

o

Nu

mb

er

of

Qu

ote

s

Thousands


0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

0

10

20

30

40

50

60

70

Qu

ote

/Execu

tio

n R

ati

o

Nu

mb

er

of

Qu

ote

s

Thousands



Average number of quotes was generally lower during the second-half of the year than in the first-half. Quote/execution ratios remained flat for large-cap and small-cap stocks while ratios of mid-cap stocks trended slightly downwards during the year. In line with the broad market, quote/execution ratios remained significantly lower than pre-July 2011 levels, a likely result of the implementation of narrower tick size and the Reach trading engine.

Large-Cap average daily total quotes varied between a minimum of 48,000 in October 2012 and a maximum of 112,000 in June 2012 during the twelve months.

Mid-Cap average daily total quotes varied between a minimum of 30,000 in July 2011 and a maximum of 62,000 in June 2012 during the twelve months.

Small-Cap daily average total quotes varied between a minimum of 35,000 in August 2012 and a maximum of 66,000 in February 2012 during the twelve months.

2.3. Number of Trades and Average Trade Size

Overall

Source: Reuters

The impact of SGX’s initiatives including the reduction of minimum bid sizes (4th July 2011) and the implementation of the Reach trading engine (15th August 2011) continue to be seen. Despite a decline in the third and fourth quarters of 2012, the average number of trades during this period remained twice that of pre-July 2011. Furthermore, average trade sizes ranged between $12,000 and $16,000, considerably lower than the $33,000 to $37,000 range of the January 2011 to July 2011 period.

$0

$5

$10

$15

$20

$25

$30

$35

$40

0

20

40

60

80

100

120

140

Avera

ge T

rad

e S

ize

Thousands

Nu

mb

er

of

Tra

des

Thousands

Average Daily Total Trades Average Trade Size


3. Volatility

3.1. Daily Average Price Volatility

Overall

Source: Reuters

Note: Volatility is calculated across all stocks and is not weighted according to market capitalisation or value traded.

Daily average price volatility peaked at 1.8% in February 2012 – amid greater uncertainty in the

global markets arising from renewed concerns of the Euro-zone debt crisis, growth moderating in China and a slowdown in the US recovery. During the subsequent four months, volatility eased to 1.1% before increasing again in the final six months of 2012. Movements in the daily average price volatility were largely in line with the CBOE Volatility Index over the 12 months.

Large-Cap

0

10

20

30

40

50

60

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

Avera

ge D

ail

y P

rice V

ola

tili

ty

Average Daily Price Volatility VIX (CBOE Volatility Index)

US

Vix

(CB

OE

) Vo

latility

In

dex

0.0%

0.2%

0.4%

0.6%

0.8%

1.0%

1.2%

1.4%

Avera

ge D

ail

y P

rice V

ola

tili

ty

Average Daily Price Volatility


Mid-Cap

Small-Cap

Source: Reuters

Longer trends show that the securities market exhibited lower price volatility during the final two quarters of 2012 than over the same period in the previous year. Price volatility of large-cap, mid-cap and small-cap stocks averaged 0.35%, 0.41% and 1.12% during the second-half of 2012 compared to 0.53%, 0.58% and 1.39% during the second-half of 2011, respectively.

Large-cap and mid-cap stocks showed similar levels of price volatility through the peaks and troughs over the twelve months. During the February 2012 to May 2012 period, volatility of large-cap and mid-cap stocks eased by 0.3% and 0.4%, respectively. A sharp increase in May 2012 was followed by a gradual decline in the subsequent months for both size categories.

Small-cap stocks displayed comparably higher volatility over the twelve months and its movements were largely in line with the broad market. Daily average price volatility peaked at 2.06% in February 2012 – amid greater uncertainty in the global markets. An easing to 1.3% from February 2012 to June 2012 was followed by an upward trend towards the end of the year.

0.0%

0.2%

0.4%

0.6%

0.8%

1.0%

1.2%

1.4%

1.6%

Avera

ge D

ail

y P

rice V

ola

tili

ty


0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

Avera

ge D

ail

y P

rice V

ola

tili

ty



4. Trading costs Large-Cap

Mid-Cap

Small-Cap

Source: Reuters

0.00%

0.02%

0.04%

0.06%

0.08%

0.10%

0.12%

0.00%

0.05%

0.10%

0.15%

0.20%

0.25%

0.30%

0.35%

Pri

ce I

mp

act

Rela

tive S

pre

ad

s

Relative Effective Spread Price Impact

0.00%

0.02%

0.04%

0.06%

0.08%

0.10%

0.12%

0.14%

0.16%

0.18%

0.00%

0.10%

0.20%

0.30%

0.40%

0.50%

0.60%

0.70%

0.80%

Pri

ce I

mp

act

Rela

tive S

pre

ad

s


0.00%

0.20%

0.40%

0.60%

0.80%

1.00%

1.20%

0.00%

1.00%

2.00%

3.00%

4.00%

5.00%

6.00%

7.00%

8.00%

9.00%

10.00%

Pri

ce I

mp

act

Rela

tive S

pre

ad

s



For Large-Cap stocks, price impact cost remained constant at 5 bps for most of 2012. Relative effective spread (a measure of the cost of demanding liquidity) also remained steady between 25 bps and 27 bps over the twelve months.

For Mid-Cap stocks, price impact cost trended upwards from 8 bps in February 2012 to 10 bps in May 2012. During the final two quarters of 2012, it leveled off at 9 bps. Relative effective spread widened from February 2012 to July 2012 before steadying at 52 bps to 54 bps.

For Small-Cap stocks, there was a sizeable 52 bps decrease in price impact cost during the first-half of 2012, coinciding with the penny stock rally. A sharp increase of 32 bps in July 2012 was followed by a gradual downward trend. Relative effective spread widened from February 2012 to June 2012 before narrowing significantly in July 2012. Finally, over the six months to December 2012, it widened by 87 bps.

The trading costs for large-cap and mid-cap stocks were evidently lower during 2012 than pre-June 2011. Relative effective spread and price impact cost were lower by 3% and 2% for large-cap stocks and 10% and 4% for mid-cap stocks, respectively, during the last twelve months than in 2011. The enhancements to our infrastructure and market microstructure in 2011 appear to have further improved the market for all participants.


Definitions 10 Tick Depth: is the total depth posted at quotes within +/- 10 ticks from the standing midpoint at

any one point in time. It is an indication of the depth available if a trader wants to trade within 10 ticks of the current indicative price. For a monthly figure we take the mean of the average 10 tick depth for each listed stock in the category during the month.

( ) ∑ ( ( ) )

[ ( )]

[ ( )]

Average Daily Total Quotes: is the Total Monthly Quotes across all stocks in that category divided by the number of trading days in the month. Average Daily Total Trades: is the Total Monthly Number of Trades across all stocks in that category divided by the number of trading days in the month. Average Daily Traded Value: is the Total Monthly Traded Value across all stocks in that category divided by the number of trading days in the month. Average Daily Traded Value Per Stock: is the ‘Average Daily Traded Value’ divided by the

number of listed stocks in the category during the month. Average Daily Volume: is the Total Monthly Volume across all stocks in that category divided by

the number of trading days in the month. Average Daily Volume Per Stock: is the ‘Average Daily Volume’ divided by the number of listed

stocks in the category during the month. Average Trade Size: is the Total Monthly Traded Value divided by the Total Monthly Number of

Trades across all stocks in that category. Daily Average Price Volatility: is the average of the percentage standard deviation in prices for

each stock in the category that traded on that particular day.

( )

( )

( )

∑ ( )

n = Number of stocks that traded on day t.


Large-capitalisation stocks: comprise the 30 Straits Times Index (STI) component stocks. Mid-capitalisation stocks: comprise the 50 Straits Times Mid Cap Index component stocks. Price Impact: is the mean of the average daily price impact cost for each stock that traded in the

category during the month.

( ) (

)

Proportion of Married Trades: refers to the proportion of total traded value and volume that are

‘married trades’4. Quote/Execution Ratio: is the Total Monthly Quotes divided by the Total Monthly Trades across

all stocks in that category. Quoted Percentage Spread: is the quoted spread as a percentage of the standing midpoint at

any one point in time. For a monthly figure we take the mean of the average quoted percentage spread for each stock in the category during the month.

( ) ( )

Relative Effective Spread: is the mean of the average relative effective spread for each stock that

traded in the category during the month. It is a measure of the cost of demanding liquidity.

( )

D is the direction of the trade. A value of 1 for a buyer initiated trade, and a value of -1 for a seller

initiated trade. Small-capitalisation stocks: comprise all remaining SGX-listed stocks after excluding the mid-capitalisation and large capitalisation stocks. Value/Volume Ratio: is the Total Daily Traded Value over the Total Daily Volume across all stocks in that category.

4 For more information regarding Direct Business trades or ‘married trades’ please refer to the SGX Rulebook

(http://rulebook.sgx.com/).


Contact Details

Singapore

Rama Pillai

(65) 6236 5157 [email protected] William Wong (65) 6236 8122 [email protected]

London

David Battle

(44) 2070 606668 [email protected]

Tokyo

Atae Toshihiro

(81) 3 5403 4680 [email protected]

www.sgx.com

This document is not intended for distribution to, or for use by or to be acted on by any person or entity located in any jurisdiction where such distribution, use or action would be contrary to applicable laws or regulations or would subject SGX to any registration or licensing requirement.

This document is not an offer or solicitation to buy or sell, nor financial advice or recommendation for any investment product. This

document has been published for general circulation only. It does not address the specific investment objectives, financial s ituation or particular needs of any person. Advice should be sought from a financial adviser regarding the suitability of any investment product before investing or adopting any investment strategies. Further information on this investment product may be obtained from www.sgx.com.

Investment products are subject to significant investment risks, including the possible loss of the principal amount invested. Past performance of investment products is not indicative of their future performance. Examples provided are for illustrative purposes only.

While SGX and its affiliates have taken reasonable care to ensure the accuracy and completeness of the information provided, they

will not be liable for any loss or damage of any kind (whether direct, indirect or consequential losses or other economic loss of any kind) suffered due to any omission, error, inaccuracy, incompleteness, or otherwise, any reliance on such information. Neither SGX nor any of its affiliates shall be liable for the content of information provided by third parties.

SGX and its affiliates may deal in investment products in the usual course of their business, and may be on the opposite side of any trades.

Investment in this product is restricted to accredited investors.

SGX is an exempt financial adviser under the Financial Advisers Act (Cap. 110) of Singapore.

The information in this document is subject to change without notice.

Singapore Exchange • London • Tokyo • Beijing 2 Shenton Way, #19-00 SGX Centre 1, Singapore 068804 Main: (65) 6236 8888 Fax: (65) 6535 6994

Securities Market Quality Indicators...SGX The Asian Gateway 1 Introduction Welcome to the third...

Documents

Transcript of Securities Market Quality Indicators...SGX The Asian Gateway 1 Introduction Welcome to the third...