The Singapore Exchange (SGX) has conducted a review of the market quality of the Singapore securities market during 2013 and has published its findings.
It predicated its research on studies that show stock price is an important function of liquidity, which in itself is a major component of market quality.
SGX said that low-priced securities are generally associated with the risk of high volatility, making them more susceptible to excessive speculation and market manipulation, but higher-traded prices are associated with greater liquidity and market depth.
SGX’s study investigated if a higher level of market quality was observed at different levels of stock prices, using bid-ask spreads and quoted best depth value.
SGX said that these two liquidity measures indicated the implicit trading costs faced by investors. A lower implicit trading cost ensured that investors will achieve a better quality of execution, which pointed to a higher quality market.
The findings of the study were as follows:-
Stocks priced above S$0.25 were quoted with narrower bid-ask spreads and higher quoted best-depth value, SGX said that showed that trades at S$0.25 or greater displayed higher levels of liquidity or market quality.
Stocks trading at less than S$0.05 and at S$0.25 or greater exhibit tighter bid-ask spreads, suggesting lower trading costs.
Those shares that traded at prices between S$0.05 and S$0.25 were found to be largely illiquid, trading at wider bid-ask spreads during the trading day and often with one-sided order books, making it harder for investors to close out positions.