If these were all in place, and with more measures slated to be unveiled in the months ahead by a Monetary Authority of Singapore (MAS) taskforce set up to help revive the stock market, trading liquidity on the local bourse should improve, he believes.
As CEO of Grasshopper Asia, a proprietary trading firm designated as a market maker by the Singapore Exchange (SGX), Leong knows a thing or two about what makes markets tick.
His Singapore-headquartered firm has over 100 employees across trading, technology and support functions, focusing on equities and derivatives in seven markets across five countries. It started in 2006 and specialised in futures trading before diversifying into equities.
Grasshopper is also a designated market maker in Japan and on the Chicago Mercantile Exchange, a global financial derivatives marketplace. Leong was the first trader on Grasshopper’s payroll back when it was founded.
“The lack of liquidity is, unfortunately, the fundamental basis for why the market here is struggling,” Leong tells The Edge Singapore. “The stocks won’t come because there’s no liquidity. Without liquidity, talking about the products or the type of companies you want to have in the market is kind of secondary.”
Market liquidity — the ease with which stocks change hands with no significant impact on their price — is something Singapore has been struggling to bolster for years. The situation has become so bad that more and more companies are throwing in the towel and delisting from SGX.
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Last year, a total of 17 companies left SGX, while only four IPOs were launched. Another four companies were delisted in the first three months of this year, and several more are in the midst of being privatised. Excluding the 30 blue chips tracked by the Straits Times Index (STI), SGX is now home to fewer than 600 stocks.
While a number of exchanges worldwide are also facing delistings, the situation here is particularly dire. SGX, with its lack of liquidity, has for a long time not been the market of choice for private companies eyeing a public listing, including those founded in Singapore.
If delistings persist and private companies continue to look to other exchanges to get the valuations they believe they deserve, it’s a matter of time that the Singapore bourse gets hollowed out.
Reducing costs
Even as all eyes are on the MAS taskforce’s next set of measures, which are due in the coming months, there are certain things SGX can do to try to rouse interest in Singapore stocks, according to Leong.
One is to reduce the cost of trading. “The basis-point charge is very high per trade,” he says. Current clearing fees for trades on SGX are 0.0325% of the contract value. They were last revised in 2014 from 0.04%.
“I can trade the US markets for free,” he says. “And we’re not Hong Kong, where there’s a lot of liquidity and stocks have a lot of volatility. Singapore doesn’t have that. Relatively speaking, our cost of trading is high.”
Hong Kong Exchanges and Clearing (HKEX), which operates the Hong Kong Stock Exchange, announced in February that all stock transactions will be charged a flat rate of 0.0042% from June.
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The existing stock settlement fee structure, which includes a minimum fee of HK$2 ($0.35)and a maximum of HK$100, will be removed as it disproportionately impacts lower-value trades, according to HKEX.
“Trading costs in general have come down in Asia but they haven’t moved much in Singapore,” Leong says. “We see a whole landscape where the alternatives are cheaper.”
“What has changed (in Singapore) is the minimum commission charged by brokers. It used to be about $20 a long time ago. Now it’s around $10 for a lot of brokers. But if I were a young investor with a couple of hundred dollars to invest, I can’t afford that. That’s 5%. That’s just not doable.”
Besides lower trading costs, a higher free float requirement can also benefit Singapore’s equities market, says Leong. Many firms, he points out, are simply too tightly held, with some having only 10% to 20% of their shares available for public investors. Market making, he adds, should also be enhanced to elevate interest in lower liners.
Market making
In 2014, SGX launched what it called the market maker and active trader programmes in a bid to improve liquidity and facilitate trading at competitive bid and offer prices. Rebates and waivers on certain costs, such as clearing fees, are offered to designated market makers and liquidity providers based on how well they do their job.
According to an SGX spokesperson, designated market makers and active traders provide continuous two-way pricing and liquidity to facilitate tighter bid-ask spreads and better market depth.
“They participate across a broad range of mainboard and Catalist stocks, covering over 90% of our securities market’s traded value,” the spokesperson tells The Edge Singapore. “Together with other institutional and retail participants, market makers and active traders help to develop our ecosystem’s diversity, vibrancy and resilience.”
A key difference between the two programmes, say practitioners, is that market-making often entails a lot more stocks.
“In market making, you’re managing orders for at least 100 counters in any one day, including not-so-liquid stocks,” says Elvin Wee, a director at Singapore-based North Point Global, a liquidity provider founded in 2014.
For the active trader programme, participants, including high-frequency trading firms, tend to be much more selective of which stocks they want to get involved with, says Augustine Wu, another director at North Point Global.
“Most participants in the active trader programme gravitate towards the more liquid counters. To qualify for incentives, you need to hit certain KPIs, which are usually tied to volume. To reach those volumes, they need to trade liquid stocks as liquidity begets more liquidity,” says Wu.
Both programmes have been in place for over 10 years now. On the face of it, the market’s chronic lethargy suggests they have fallen short of what SGX had in mind initially.
But market makers like North Point Global say the local bourse would be in even worse shape if not for these two initiatives.
“The SGX market maker programme is definitely not a failure, but of course, as with all programmes, it ain’t perfect either,” Wee says. “This programme was worth its salt during the Covid pandemic when there was an acute lack of liquidity in the market. Market makers like us were able to come in to support the REITs, the banks and other stocks to ensure they had sufficient trading liquidity.”
SGX declined to disclose details about both programmes, such as how many and which stocks they cover, how much impact they have had over the years, and which financial institutions or trading firms have signed up as market makers and liquidity providers.
According to market watchers, the programmes work for many of the 30 STI constituents but fall short for most of the mid- and small-cap stocks, some of which are not even traded at all for days on end.
The two programmes also do not appear to be actively marketed by SGX anymore. Designated market makers say SGX prohibits them from divulging details.
“We don’t go directly to the companies to offer market-making services. SGX just gives us a list of stocks that we can market-make. We get rebates in return if we do it,” says Desmond Gan, head of market making and liquidity provision at Phillip Securities. “The listcos don’t even know we are making a market for them.”
Wee says SGX was quite active in the initial years in encouraging traders to take advantage of the fee rebates but became less so after some of them ended up focusing on only certain stocks. “Not all stocks benefit from this programme as market makers will tend to focus more on the very liquid names.”
The way some see it, SGX doesn’t want to oversell the programmes as it wants to avoid a situation where a stock gets out of hand and MAS, which oversees the bourse operator, ends up having to step in.
“Hypothetically, a market maker can do such a good job that a stock just keeps running up. But the listed company in question has no public announcements or good news to share that justify the run-up. And this keeps going on for an extended period. That is a risk that the exchange will want to avoid,” says the head of global sales at an Asian brokerage who declined to be named.
Such concerns may be why shares of companies with issues, such as those that are financially unsound or have run afoul of the law, are usually not covered under the programmes. “There are some stocks that are simply untradable,” says Wee.
Private arrangements
Being so-called untradable is a reason the controlling shareholders of some of these companies directly approach brokers or trading firms like North Point Global for help to raise the profile of their stocks.
These shareholders enter into what is known in the industry as commercial market-making programmes, a private arrangement between them and the broking house or trading firm of their choice. SGX is not involved in such deals.
“Most of the time, when these shareholders come to us, they definitely want their share price to go up. But we tell them we can’t actively make the price go up because that would be manipulation, which is a breach of rules,” says Phillip Securities’ Gan.
“What we can offer instead is liquidity. We try to provide good entry and exit price levels for investors. We are here to facilitate a natural flow of orders. And if your company has good fundamentals, naturally, your share price will go up.”
Private commercial market making is not without risks or downsides. Similar to SGX’s market maker programme, there are times when there is simply no public interest in a stock, even if continuous two-way pricing and tighter bid-ask spreads are made available.
“The worst scenario is when a company’s substantial shareholders want to exit, and they engage us to post the bid-ask quotes. We end up buying their shares in such cases,” says Gan. “I would say 80% of the time, we lose money when we engage in private commercial market-making agreements.”
While securities regulators do not openly endorse these private arrangements, they do not frown upon them either — provided the market makers themselves stay on the straight and narrow.
“Our market-making activities are done strictly within the boundaries of the listing rules and regulations, and we actually view market-making as providing a service,” says Wee.
‘Natural lubrication’
Citing the experience of markets like Japan and the US, where more than half of the trades involve market makers, Grasshopper’s Leong says there is room for legitimate market-making in Singapore. “This is natural lubrication for the whole ecosystem.”
If SGX does not want to have to constantly monitor market makers and liquidity providers to prevent price manipulation, it can get broking houses to work directly with them, says Leong. Such an arrangement, he figures, is akin to appointing an underwriter to stabilise the shares of a new listing if necessary.
“Why don’t you incentivise the brokers? Give them a list of market makers that have behaved well. That’s the baseline. Incentivise them to sign market-making agreements and tacitly support it at the side.”
Based on Grasshopper’s experience, market-making in Singapore works best for stocks priced below $2. “We look at stocks that behave with two-sided liquidity, those that don’t go in just one direction but also have characteristics that allow us to manage our risks effectively. The majority of stocks that honestly have liquidity are under $2.”
Keen competition
Rejuvenating Singapore’s stock market remains very much a work in progress and goes beyond incentivising market makers and liquidity providers.
The US remains the go-to place for many private companies worldwide that want to list, given the depth and liquidity of the New York Stock Exchange and Nasdaq. The growing popularity of private credit — non-bank loans from private investment funds — is also making some businesses reconsider tapping stock markets as their first choice for funds.
Against this backdrop, stock exchanges worldwide, including SGX, have to scramble for the attention of investors, traders and privately held businesses that are contemplating going public.
Hong Kong, for instance, besides recently announcing a reduction of the bid-ask spread for stocks and removing the minimum and maximum settlement fees for trades, is also considering standardising the minimum board lot to make higher-priced counters more affordable for investors. Minimum board lots there are currently determined by companies themselves and can be 100, 500 or 1,000 shares.
As part of efforts to pacify investors burnt by companies that have been forced to delist, Hong Kong is reportedly drafting rules for an over-the-counter (OTC) exchange that could help them recoup some losses. An OTC market will provide an exit for investors looking to dispose of shares of delisted companies and will involve market makers to help generate liquidity, Bloomberg reported early this month.
In Thailand, tax incentives are being doled out to entice investors to park money in funds that invest in locally-listed companies. Over in Australia, dual-class shares are being considered in a bid to revive the IPO market. Dual-class structures, which are common in the US, often have two or more types of shares with different voting rights. Such arrangements allow company founders to retain control of the business even if they hold less equity.
With competition among exchanges heating up, the MAS taskforce faces a tall order. Its measures have to be far-reaching and cover all corners to get the stock market out of its rut. The stakes are high and it can’t afford to leave any stone unturned. Policies and even personnel that are no longer relevant have to go.
Its first set of measures, unveiled in February, includes a $5 billion fund for the central bank to invest alongside select fund managers in a range of Singapore stocks. Various tax incentives and a requirement for those looking to set up single-family offices in Singapore to invest at least $50 million in local stocks were also announced.
The second and final tranche of measures is due by the end of the year. These will focus on helping companies improve their engagement with shareholders, generating greater interest among retail investors through initiatives like smaller board lots, enhancing investor protection and post-trade custody efficiency, and developing cross-border partnerships with other exchanges.
The entire securities industry here — including regulators, stockbroking firms, Catalist sponsors, investment banks, and listed companies — and service providers like corporate lawyers and auditors should have much to look forward to if the taskforce pulls it off.
The opposite will be just as consequential. Investors will just keep putting their money to work elsewhere while companies continue to turn to where they can get better valuations, leaving the market here to hollow out.
“We know it’s a big uphill battle, but the core thing has to be liquidity,” says Leong. “We need to do what is necessary to bring people back to the market first.”
SGX market makers and active traders
The aim of SGX’s market maker and active trader programmes is to improve liquidity and facilitate trading at competitive bid and offer prices.
SGX will offer rebates or waivers on certain costs, such as clearing fees, based on the performance of the market maker or active trader. Both programmes are open to all market participants who trade as a principal using proprietary capital, and who meet certain eligibility criteria.
Eligible securities
Both programmes are applicable for cash equity securities, including shares, real estate investment trusts and business trusts. Issuers that would like to be considered as an eligible security should approach SGX for more information. Exchange-traded funds and structured warrants have their separate liquidity-enhancing frameworks and are excluded from these schemes.
