Long and winding road (2)
In a depressed market environment such as we are currently affected by, unfortunately, I think it will not be enough of a motivation for the private sector to take up the cudgels.
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In a depressed market environment such as we are currently affected by, unfortunately, I think it will not be enough of a motivation for the private sector to take up the cudgels.
There is a refrain in this memorable Beatles song that goes “...And still they lead me back to the long winding road. You left me standing here a long, long time ago…” Doesn’t this give you that feeling of deja vu that you’ve been there, done that?
This song may as well be the theme song for our capital market. The issues facing the market stakeholders have been around for ages and like a needle stuck on a 45 rpm record that goes round and round, the refrain repeats endlessly.
Taking off from last week’s article which dwelt on some ages old key investor concerns, i.e., the dearth of listed stocks to choose from in a market that lacks depth and breadth, and the absence of a market-making structure that can give confidence to investors that an orderly exit from their stock position at fair market prices when needed can be reasonably expected, are there resolutions that the market stakeholders can look forward to?
One small step regards the need for an orderly exit under reasonable conditions for investors. The SEC recently issued a draft circular on market maker guidelines for public comment.
What are they?
To be eligible as an authorized market maker, in gist, one must have capital of at least P100 million paid up; must be a SEC registered broker-dealer and a trading participant; must have at least three years continuous operating track record, or have key personnel with five years working experience in a World Federation of Exchanges (WFE) member firm. Note that the Philippine Stock Exchange is a member of the WFE, which means that any former employee of a broker-dealer should satisfy the criteria.
The most important requirement is that the market maker must always maintain during trading hours a two-way quotation of bid and offer prices at very tight spreads regulated by the PSE.
This will apply to any securities it might be making a market for. However, the guidelines as to the number are silent in this regard. Presumably it will be at the discretion of the authorized market maker.
As an incentive, market makers will be entitled to reduced transaction fees, liquidity commission rebates, and enhanced connectivity support.
The big question is whether the proposed guidelines are attractive enough for any firm to commit to becoming a market maker given the price risk on the inventory that it will have to take on any stock they will market make for. It will of course be logically a function of the trading volume.
In a depressed market environment such as we are currently affected by, unfortunately I think it will not be enough of a motivation for the private sector to take up the cudgels. The government will have to be proactively supportive, perhaps with the cooperation of a government financial institution such as a bank or a pension fund serving as a counter party on the buy and sell side or a provider of securities.
Another step in this long and winding road that needs to be traversed in a move designed to democratize and encourage more listings is the relaxation of IPO rules through a tiered minimum public ownership float to induce more companies, both the big as well as the smaller ones, to list.
Previously, a company going public must have at least 20-percent public ownership. This threshold has been lowered to 15 percent. As a rule, the larger the market capitalization, the lower the IPO minimum public ownership requirements.
However, an exception may be allowed if an issue can potentially have a P200-billion market cap. In such a case, the allowed minimum public ownership can be as low as 12 percent. Such situations can occur if a highly successful company can be beneficial for the market if listed, but dilution is a concern for the majority shareholders. A notable example is Mynt, the majority owner of the highly successful GCash digital payment company, which pundits expect to be a market blockbuster.
On the flip side, for SMEs aspiring to be listed but will likely only have a market capitalization of not more than P500 million and not more than an offering size of P100 million, the minimum public ownership requirement is pegged to be not less than 33 percent.
The above concerns are just a nibble of a myriad of issues that need to be addressed which we hope to expound on over the next few issues. What is clear, however, is that the issues are interrelated so solving an issue or two will not do it. But if we will be able to resolve at least some low hanging fruits it might be sufficient to resuscitate a gasping, oxygen-starved market in the near term.
Until next week… OBF!
