|Board lot size tweaks affecting investment flexibility. Source: freepik.com |
The reason for expanding the minimum board size lot, as commonly believed, is because market liquidity has expanded sharply in 2020 and 2021 and thus overloaded the trading system. Therefore, in order to reduce the number of trading orders, the increase in the minimum board size lot has been suggested as a possible solution.
Raising the minimum trading slots is a counter-trend movement against the global trend, as many stock exchanges in other countries are trying to reduce the trading slots. For example, the Singapore Stock Exchange reduced the board lot size from 1,000 to 100 in 2015, and JPX’s Tokyo Stock Exchange also reduced it from 1,000 to 100 in 2018.
Nonetheless, assuming the new trading system is not yet ready to be implemented, it is understandable that an increase in the board size lot – as a possible solution – could safeguard the trading system from collapsing and failed trades – which are the negative points when considering whether to promote Vietnam from a frontier market to an emerging one by both the FTSE and MSCI.
However, raising the minimum board size lot may introduce many challenges to market liquidity and investors’ equity. Firstly, by raising the lot to 1,000, the minimum capital committed per order will be mathematically 10 times higher. For example, investors will have to commit approximately VND100 million ($4,350) just to buy a lot of Vinamilk’s stocks.
It will be very difficult for individual investors to invest in listed stocks at the Ho Chi Minh City Stock Exchange (HSX) and they may feel like they are treated unfairly compared to institutional competitors, Phuong said.
Secondly, it has been argued by both the Japan Exchange Group and the Singapore Exchange on their websites that a reduction in the board lot size will enhance the market liquidity as it creates flexibility for both private and institutional investors.
This seems to be a counter-argument against the expectation that market liquidity may improve by 30 to 50 per cent following the imposition of a minimum board size of 1,000 units. Logically, as mentioned before, large board size lots will make it harder for private investors to execute their trade strategies.
As private investors provide the majority of market liquidity in Vietnam, these obstacles may hinder private investors’ willingness to enter the market which, in turn, could negatively affect market liquidity. Even institutional investors are not immune to the problems caused by large board size lots as these make it harder to reach optimal asset allocation.
As a result, those difficulties will likely dampen market liquidity, not enhance it, and this could lead to wider bid-ask spread which is a sign of market inefficiencies.
Therefore, given the many potential difficulties imposed by the rising minimum board size, it requires careful considerations by relevant authorities before the implementation of this proposal.
Alternatives could be considered to relieve the current system overload.
Another possible solution is to transfer some stocks to the Hanoi Stock Exchange (HNX) to trade. However, even with legal support, some companies are not willing to move their equity from the HSX to the HNX. As both exchanges have different listing requirements, moving to HNX may create a vibe of “not so high-quality” stocks.
This negative impression is not what company owners want to achieve as it may negatively impact their business operations. Thus, it creates a free-rider problem, as companies who are already on the HSX will benefit at the expense of those moving to the HNX for the greater good.
This problem will surely discourage companies to voluntarily transfer to the HNX. Perhaps, financial authorities should consider special policies that allow companies that voluntarily move their stocks to the HNX for listing to mitigate the negative impact or even introduce some forms of rewards to motivate them to do so.
One of the possible solutions is to quickly create a new index consisting of incumbent HSX-listed stocks that voluntarily move to it, so that those companies can distinguish themselves from those which are already listed on the HNX.
This index should be temporary and when the new trading system is implemented on the HSX, the index will be discontinued and those stocks will be moved back to the VN-Index. Financial rewards or tax-break allowances should also be considered to reward those volunteers. However, those should only be temporary solutions. The best and most sustainable solution is for the HSX authorities to quickly finalise all required procedures and implement the new trading system.