Tuesday, July 28, 2009

KLSE New Tick Size Impact

this is a follow up post ...

This is the current tick size in KLSE. It means if you buy a stock at RM 0.900 the next up price is 0.905 and the next down price is 0.895. Like wise, if you buy a stock at RM 1.01, the next prices are RM 1.00 and RM 1.02

If we plot a graph across a range of prices, we can observe that the tick size may imply a different percentage to each price, also known as having different weightage.

For example, if we buy at RM 1.00, the tick size is RM 0.01, so the weightage is 1%. If we buy at RM 2.00, the tick size is the same but the weightage is 0.5% <== ( 0.01 / 2 * 100 )

Y axis : tick size weightage
X asix : stock price

From above chart, we can see that the tick size effect is broadly cap at 1% except when the prices are lower than RM 0.50. So buying stocks at RM1, RM5, RM10 and RM 25 have similar effect, percentage wise.

Below is the latest tick size starting from 3 Aug 2009.

And this is the associated graph.

When you put both graph together, the current / old tick size vs the future / new ones, you get below graphs ...

There are no changes for stock prices below RM 3.00

However, all stock prices at and above RM 3.00 have significantly changes ! In short, starting on RM 3 onward, the tick size weightage is moving toward Zero as the stock price increases. With an exception at RM10+.

This brings to 2 recommendations when the new tick size is implemented;
1. Long term investors can now accumulate expensive stocks with much cheaper cost, especially those between RM 3 and RM 10.

2. The only speculatable ground is now reduced to below RM 0.50 arena only.
In short, this is great for both long term investors and speculators. Generally more expensive stocks ( above RM 3 ) are running business at larger scale. Reducing speculation on these businesses and attracting more long term investors generally allow them to grow steadily and improve health on the play ground.

However Malaysia shares buyers don't really know much about Minimum Optimized Trading Size and Tick Size Weightage anyway. Most do NOT trade strategically. Hence we will most probably NOT see any BIG change in trading habits especially for retail investors.

On the other hands, fund managers are not that ignorant on this aspect. If the mutual fund you are holding also invest mostly into RM3 to RM10 stocks, like those capital growth fund. The average fund's transactional cost could save as much as 75% simply by doing nothing after 3 Aug.

Take RM10 stock for example, one tick size changes from RM0.10 to RM 0.02, that is a 80% discount!

Although this saving is actually a strategical cost saving, not a real and direct cost saving. But nevertheless this will still leave a positive impact on a fund's portfolio. So theoritically, your mutual fund should start giving you better return after 3 Aug. Fund managers who choose not to report about this cost saving in their next annual report, are fund managers you should consider challenging on their transparency, honesty and their true interest with your money.

I can finally buy more BAT ... :)


Aree said...

"Take RM10 stock for example, one tick size changes from RM0.10 to RM 0.02, that is a 80% discount!"

Isn't it work both way?
Yes, (because of tick size change) you kind of getting 80% discount when you buy. But you will also give back that discount when you sell.

Aree said...

Forgot to mention,
Thanks for the statistic stuff, you are offering something different.

Michael Tsen said...

Thanks Aree for your compliments,

Yes thats why this is called 'strategical cost' and not the 'real cost', the actual and real cost will depend on your exit price. If the exit price is largely different than the entry price, the tick size effect will be minimum.

On the other hand, if the exit and entry prices are the same or similar then this tick size may become important. So all speculators should know about tick size by heart ... but guess what, almost ALL Malaysia broker agents DO NOT even care what the tick size when helping clients in speculative transactions.

Michael Tsen said...

Hi Aree, the "80%" is actually a trick I purposely embeded inside, I secretly told myself that I will give the person who spotted that a gift. Please contact me to claim your free gift :D

there are actually many more such embeded mistakes in many old posts, but you are the first one who actually spotted one ... thank you for that :)

Aree said...

Due to reduced tick size, I could perceive I am buying at lower price than before.
If I get 'perceived lower price' when I am buying, I also will get 'perceived lower price' when I selling it in the future. When I am buying at 'perceived lower' entry price, somebody must be selling at his 'perceived lower' selling price. That somebody could be cursing on reduced tick size, if not he can sell to me at (slightly) higher price. That somebody will be me in the future.

I still don't get it on the 'strategical cost' can be lower. Referring to both buying price and brokerage, I only can see that if you buy and the sell at the same price. Buy and sell at the same price will not effect you; be the tick size it 1ct or 10ct. Funny, I have totally opposite view on these. Terminology?

Well on the 80% part, suprised me it can effect that much. If that can happen, it only for sub-penny stocks. Incidentally I also gave opinion on tick size but more into penny stock's liquidity. You can read it here: http://bursa-malaysia.blogspot.com/2009/08/klse-new-tick-sizes-and-penny-stocks.html

Anyway, I think:
How much impact tick size can give to a counter depend a lot on it price category. Liquidity affect on RM50 will be very different with RM0.50 counter. 'Statistical distribution analysis' stuff would give better view.

So long I haven't received a gift from somebody other than my family members. :-D

Embeded? Kind of 'treasure hunt' or easter egg in a blog. Interesting marketing concept.

Michael Tsen said...

to understand this tick size effect, just observe BAT stocks last week, which was also hinted before it happens.

Michael Tsen said...

example with numbers at http://malaysiapersonalfinance.blogspot.com/2009/08/tick-size-has-no-effect.html