Smaller Trade Size on SGX Fails to Improve Market Quality, CMCRC Reports

Not all market fixes help the market – or even the Average Joe retail trader.

That’s what the Singapore Exchange (SGX) has found out after instituting a problem designed to decrease the minimum trade size (board size) and make trading cheaper for retail investors.

The Capital Markets Cooperative Research Centre (CMCRC) has released analysis showing that the move by the SGX which lowered the minimum board lot earlier this year has had no detrimental impact on market quality. The minimum board lot was lowered from 1,000 shares to 100 shares on January 19 with the aim to make trading more attractive and affordable for retail investors.

The CMCRC analysis showed that stocks with higher prices have experienced significant declines in their average trade size whereas stocks with lower prices exhibited almost no change. This result was unsurprising given that higher priced stocks are more likely to be impacted by the minimum board lot.
The analysis also showed an increase in the number of trades per day with the majority of these being of a smaller size.

“The question is whether this change has actually led to an increase in trading. However, we saw little discernable evidence of an increase in trading value,” said Professor Mike Aitken, head of the CMCRC. “This suggests that the increase in trade count has been driven by the reduction in trade size rather than the entry of more retail traders.”

Aitken also examined proxies of market efficiency and integrity and found that there had been no significant changes since the lowering of the minimum board lot occurred.

“Overall, our analysis showed that while retail traders have had their access to the market improved, this has happened without any impact on market quality,” he said. “Unfortunately, without client identifiers, we cannot address the question of whether the change has been effective in encouraging retail traders to participate more fully in the market.”

The CMCR Centre is a research organization funded equally by the Australian Government, an alliance of University partners and industry partners including regulators, exchanges and market participants across 10 countries. Research is funded from pooled funding and not sponsored by individuals, companies or institutions.