Minimum lot size cut will be boon for Asian traders

Asian traders approve of the proposal by the Singapore Exchange to cut the standard board lot size for securities.

Asian traders approve of the proposal by the Singapore Exchange (SGX) to cut the standard board lot size for securities.

SGX suggests cutting the minimum size from 1,000 to 100 units during the first quarter of 2014 and has started a consultation process.

“Lowering tick and lot sizes is one of the primary platforms of the eTrading Association,” says Philip York, Hong Kong-based director of the eTrading Association and the CEO of asset management firm Alt 224. “We’re not standing in a trading pit with pen and paper anymore, so there is no need for minimum lot sizes or the large tick sizes we see in some Asian markets.” 

SGX’s ultimate plan is to reduce the minimum board lot size to a single share in the longer term. Therefore the proposed reduction to 100 units is an interim measure which would allow SGX to assess the market impact.

“If you want to maximise your compound return, as any manager does, you want to be able to adjust your exposure on the smallest incremental basis you can.  The smaller the lot and tick size, the more incrementally a trader can manage risk and compound return,” added York.

SGX said it thought the move would benefit the public as investors will find it easier to invest in higher-priced shares.

“Many of the index component stocks and blue chips tend to be higher-priced,” said the exchange. “This will enable retail investors to more easily build balanced and diversified portfolios to grow their savings. Institutional investors will also be better able to manage their risk exposures through finer asset allocation of funds.”

The proposed standard board lot size of 100 units will apply to ordinary shares, REITS, business trusts, company warrants, structured warrants, extended settlement contracts and shares on GlobalQuote. 

Board lot sizes that are already below 100 units will not change. There are also no plans to change board lot sizes for exchange traded funds, American Depository Receipts and fixed income instruments, including Singapore Government Securities and preference shares.

It remains to be seen if other Asian exchanges will follow Singapore’s lead on lot sizes or on a parallel theme, permitting shares/contracts to be traded in fractions. 

For example, Hong Kong trades both Hang Seng futures, and mini Hang Seng Futures. However, the mini version of the contract does not trade in significant volume and traders have said that they would prefer to trade the bigger contract denominated in fractions rather than have the market fragmented into two separate pieces.