Tuesday, August 26, 2014

A STI Reform That Make No Sense !

Referring to the announcement by SGX dated 25th August 2014 (General Announcement::SGX to introduce reduced board lot size from 19 January 2015), in which from 19th January 2015 onwards, the minimum board lot size will be reduced from the present of 1,000 share to 100 share.  The rationale for the reform as cited by SGX CEO "The reduced board lot size will benefit all investors and make it easier to invest in blue chips and index component stocks which tend to be higher-priced. It will also allow institutional investors to better manage their risk exposures through finer asset allocation of funds.

The intention was good by apparently it will be a half-hearted effort if broker houses do not change to their brokerage/commission charges.  At present, broker houses are charged a brokerage/commission fee of minimum $25 or 0.28% (on average from various broker houses) of contract value for each transactionTake the case of buying 1 board lot (1,000 share) of DBS present at a price of $17.95 (closing price on 25th Aug 2014), the brokerage/commission incur will be $50.26 (0.28% of $17,950 as that value is more than the minimum of $25).  Comes 19th January 2015, buying 1 board lot (100 share) of DBS say at the same price of $17.95 will incur a brokerage/commission of $25 (since 0.28% of $1,795 is less than the minimum sum of $25) if the broker houses still maintain the same brokerage/commission structure.  In order to accumulate 1,000 share of DBS by purchasing on 10 different occasions (each time buying 1 board lot of 100 share) will eventually incur a brokerage/commission of $250.  That is about 5x more expensive as compared to the board lot size of 1,000 scheme.  At the end of the day it doesn't really sound beneficially to investors in the long run.

However, if the broker houses are willing to change the brokerage/commission system to one that without the minimum fee ie just the 0.28% of contract value then it will be different story.  With a fixed percentage brokerage/commission, the amount of brokerage/commission paid will eventually be the same whether one purchase 1,000 share at a go or do it 10 times with 100 share each.  That will probably attract more investors back to the stock markets (be it trading or investing) and should be good for SGX to regain those lost daily volume.

So far no announcement from all the broker houses regarding whether there will be a revamp of the brokerage/commission charges relating to the reduced board lot size has been made.  If nothing will be done to that, the reform on the board lot size by SGX is as good as better not to have.

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