Wednesday, August 28, 2013

Do not agree on reducing the board lot

Recently SGX has announced that they are intending to reduce the board lot (1000 shares) to 100 shares per lot. I disagree with reducing the board lot to 100 lots because the number one problem now is the expense ratio.

Currently not many brokerages charge per lot with no minimum charge. Just imagine paying $25 brokerage charge when you're getting 100 shares that cost $1. Your expense ratio is 25% excluding all the other charges. Not only that, brokerage may not be able to fully fill your order, which will further jack up your expense ratio.

However, if they are only providing this only as an additional option to the 1000 shares per lot, that would be great because it will allow those who wish to accumulate shares to have an option with lower expense ratio, and a higher possibility of accumulating the number of shares that they hope to get, while letting others to get into the game, albeit with a possibility of higher expense ratio.

If they really want to reduce the board lot, then they have to enforce that expense ratio so that it makes sense for the retail investors. Otherwise, you will see a fall of liquidity for all those illiquid shares because the expense will be just too high.


Anonymous said...

Hi Little Corner,

With all due respect, your analysis doesn't make sense. A smaller lot size is to the investor's benefit as it offers more investment combinations and opportunities.

I understand what you are trying to say about the expense ratio, but someone who can afford 1x1000 shares, can likewise afford 10x100 shares. Your broker should not be charging 10x the brokerage since it 's the same stock.

A finer lot size helps with DCA: imagine if your $x can buy 1200 shares. You'd prefer the 100 lot size to the 1000 lot size, as you can be fully invested with the former.

And regarding liquidity, a smaller lot size actually improves liquidity: someone with 700 shares can easily sell at 100 lot size vs 1000 lot size.

The above are reasons why USA and Australia, with lot size of 1, have good market liquidity (esp for AU as their listings are mining/commodities biased).

chantc said...

I think you might have misunderstood. I would love it if it is 100 shares per lot with a reasonable expense ratio. However, many times I have tried to purchase 3 lots but only 1 lot was filled. In the end, you're stuck with the minimum charge that drives up your expense ratio.

You might have targeted to get 10 x 100 shares but you might just end up with 2 shares for some reason or another and you're hit with the minimum expense charge.

All in all, I'm in for 100 shares if the minimum expense charge is removed.

Anonymous said...

Ah, what you described is a different issue altogether. In your case, the market simply wasn't there for you. It has nothing to do with the lot size.

You should either 1) increase your limit price, 2) do a market order to guarantee a fill, or 3) find a more liquid stock to trade.

The "non-fill" phenomenon can happen with any lot size.

chantc said...

Personally though, it's not a different issue if reducing the board lot cause me to face these problems for me. Regardless of the illiquid nature of the company, it doesn't mean that its not worth investing in.

If the board lot is reduced which cause other problems to crop up, these problems need to be resolved and not pushed to another issue altogether.

If it cannot be resolved, then they should provide board lots in 2 sizes, similar to the current USD/SGD arrangement.

Anonymous said...

I think you need to step back and separate the issues: liquidity and lot size.

You are facing the "non-fill" problem because of your investment strategy: you pick an illiquid stock to invest. So either you pay the "liquidity premium" associated with the stock (i.e. buying with market order / higher limit price), or you accept the "no-fill" risk. There is no free lunch.

The same thing can happen on the flip side: when you want to get out of the same position, there are no buyers. So either you sell much lower (again the "liquidity premium" kicks in) or you are forced to keep your exposure in the stock.

If "no-fill" is a concern for you, a simply solution is to change your investment strategy: do a liquidity screen like calculating the average trading volume for the past 20 days and use a cutoff threshold. Then pick the more liquid stocks to invest. The return equation for a pair of comparable stocks would be:
Ret(liquid stock) = Ret(illiquid stock) + illiquidity_premium
All else being equal.

At last count, SGX has 786 stocks, of which 300 are above USD 100 million in market cap. That means there are lots of alternatives out there. So don't need to hold on to that one (illiquid) name.

chantc said...

Yes you're right. I'm risking a no-fill risk but that is the risk I'm willing to take because there are times where the market will mis-price it.

The lot size of 1000 shares reduces my risk of no-fill and also reduces the risk of me having a higher expense ratio due to the minimum charge.

The lot size of 100 shares will not reduce my risk of no-fill since this will always be there but increases the risk of me having a higher expense ratio if the minimum charge is not abolished.

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