Monday, July 27, 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 ... :)