New MSE trade range rules achieve aims

New trade range procedures seeking to allow the market to immediately reflect public sentiment to a company announcement have achieved their aims, Malta Stock Exchange chief executive officer Eileen V. Muscat told The Times Business.

A revised rule implemented by the Malta Stock Exchange in the summer allowing trade ranges to be lifted after certain announcements led Bank of Valletta plc equity to register an intra-day high of €4, a gain of 19.4 per cent, on November 1.

The trade range for BoV was removed following the bank’s announcement the previous Friday of near-record results for the financial year ending September 30.

November 1 also saw strong gains for HSBC Bank Malta plc and Lombard Bank Malta plc, leading the MSE share index to rise by 4.6 per cent, its largest increase for the year.

“The removal of the trade range on November 1 following the Bank of Valletta announcement showed that the trade range procedures were allowing the market to react to such news: letting investors adjust prices as they deemed appropriate in the light of the announcement as soon as it was made,” Ms Muscat said.

“This means that the market was allowed to immediately reflect what had been announced, and the public’s sentiment towards the announcement. From this point of view, it can be said that the new trade range procedures and methodology achieved their aims.”

Asked why the trade range rule had been revised, Ms Muscat explained the Exchange, listed companies and members had been discussing the methodology behind the implementation of trade ranges for several months. The stakeholders hoped to devise a new procedure and calculation of trade ranges that would be dependent solely on trades effected and specific published company information. Limits would be widened slightly to give more room for price adjustments within any given trading day.

By changing the methodology and procedures related to trade ranges, Ms Muscat said the Exchange sought to react to the changing market environment and the feedback from market participants.

Participants believed methodology and procedures should be more pro-active and react quicker to what was actually happening in the market, including allowing the market to adjust much quicker when a company made an announcement.

Ms Muscat said trade ranges have seen several changes since they were first implemented in 1992 as a way of adapting to the evolving trading scenario. The market mechanism seeks to avoid undue price volatility in equities.

“Trade range limits have been widened to +/- 10 per cent, giving a daily range of 20 per cent,” Ms Muscat added. “Because the new methodology is based solely on trades effected and company announcements, trade range procedures are simpler and transparent to all market participants. While the Exchange has retained the right to alter such procedures and methodology in extreme cases in line with its obligations to provide a transparent and orderly market, in the normal course of business, such discretion would not be applied.”

The new trade range rule is applied in circumstances defined in rules issued to members.

Trade ranges are applied the same way across all equities but there are instances when they are removed for a period of time.

“When equity has not traded for three consecutive days, the trade range is removed and is only re-instated when the equity has resumed trading and has traded for three consecutive days. Until this consecutive period of trading is achieved, the equity will remain trading without trade ranges,” Ms Muscat explained.

“When companies announce certain corporate actions, such as bonus or rights issues, trade ranges are removed on the day following the announcement, on the day following the record date, and on the day following the actual corporate action. This allows for the price to readjust in line with the action or announcement made. The trade range will be re-instated after three days, whether the particular equity has traded or not.”

There are no plans to widen the trade range further as the MSE believes a daily band of 20 per cent is sufficient. However, the chief executive said the Exchange was following discussions taking place at EU level on proposals for the requirement of the same types and levels of circuit breakers or trade ranges across all EU markets.

Asked whether the MSE planned similar initiatives, Ms Muscat replied: “Deepening and widening the market remains a top priority of the Exchange’s strategy.

“The Exchange is continually undertaking initiatives to achieve this aim, including the implementation of new listing boards, implementing structures to allow new participants to enter the market and bring more liquidity, looking at possible new instruments and the implementation of new technology leading to more efficient trading and post-trading procedures and more international connectivity.”