Investing in Philippines: PSE's trading threshold in the New Trading System


Sunday, October 31, 2010

PSE's trading threshold in the New Trading System

As you may already know, The Philippine Stock Exchange has a new trading system called NTS. It replaced the old system which has been serving the PSE for more than a decade. In any new program we experienced some glitches for the first few weeks of its operation but as of today I think all bugs and glitches are quite fixed and hoping that it would boost trading in the Philippines.

A friend of mine in a forum ask me regarding the new threshold...that is board lot and upper limit and lower limit of the price of each stock traded during the day. I myself am not to familiar with it since my online brokers just show the quotes and I just place my order based on those quotes. This post will be useful in understanding the next post I am going to write regarding order entry in Citiseconline.

To have a clear picture of this thresholds we I got this info from the PSE's website regarding the topic to see the entire document please click here  

                    TO PUT IT IN LAYMAN'S TERMS

VI. TRADING THRESHOLDS (See Article IV, Section 7 of the Revised Trading Rules)

1. The price for an Order should be within the Trading Threshold for
    the Trading Day. The Trading Threshold refers to the Static and 
    Dynamic Thresholds.

2. Static Threshold
a. The Static Threshold is an absolute value that defines the lower 
   and upper limit (i.e. ceiling and floor price) of the authorized 
   trading range for a Security or group of Securities in peso value or 
   any other currency permitted by the Exchange.
b. The Static Threshold shall be fifty percent (50%) of the previous 
   day’s Reference or Closing Price or the Last Adjusted Closing
   Price (LACP).
c. The Static Threshold is not applicable to warrants.

3. Dynamic Threshold
a. The Dynamic Threshold is the maximum allowable price 
   difference between an update in the Last Traded Price (LTP) of a 
   given Security or group of Securities and its preceding LTP that is 
   equal to a percentage set by the Exchange, subject to the 
   classification of a Security or a group of Securities based on its 
   trade frequency.
b. Listed Securities will be classified in three clusters and will be 
    subject to different Dynamic Thresholds as follows:

c. New Securities listed on the Exchange shall be subject to the 
    twenty percent (20%) Dynamic Threshold.
d. The Dynamic Threshold shall be determined in the following 

i. The review of the classification shall be conducted on a 
   semi-annual basis, every second trading week of January and July 
   using trading data for the preceding six-month period of July to
  December and January to June, respectively. A company’s Security
  classified under Security Cluster A that is traded 200 times in 
  between review periods will be subject to the Dynamic Threshold 
  of Security Cluster B, and a company’s Security in Security Cluster
  B that is traded 1000 times in between review periods will be 
  subject to the Dynamic Threshold of Security Cluster C.

ii. The PSE shall have the authority to reclassify the Security even 
   before the lapse of six (6) months on the basis of trade frequency 
   of the said Security.

e. The result of the review shall be published by the Exchange on 
    its website prior to the effectivity of any reclassification.

4. Freezing of a Security as a result of breaching the Dynamic and 
  Static Threshold shall be governed by these Guidelines, under 
  Security States.

5. Under Section 6(b) Article VII of the Revised Trading Rules, if 
    the Security was not traded on listing date, the Static Threshold 
   for the following Trading Day shall be based on the indicative 
   reference opening price of the Security provided by the company.

6. The Static Threshold may be lifted based on the instances set 
    forth in Section 6 Article VII of the Revised Trading Rules. The 
    procedure for lifting the Static Thresholds is as follows:

a. The PSE Market Regulation Division (MRD) or Issuer
    Regulation Division (IRD), or their successor entity, shall make a 
    recommendation to the PSE Management Committee for the 
    lifting of the Static Threshold.

b. Upon approval of the recommendation by the PSE Management 
    Committee, the PSE Market Control Department shall lift the 
    Static Threshold prior to Market Pre-Open Period.

c. If the approval of the PSE Management Committee was received 
   by the PSE Market Control Department during or after Market 
   Pre-Open Period, the lifting of the Static Threshold will be 
   implemented the following Trading Day prior to Market Pre-Open 

d. The PSE shall announce the lifting of the Static Threshold on its 
    website prior to the implementation thereof.



The PSE with its new trading system has revised the board lot to comply with the new threshold as discuss above. Before fluctuations for a stock's price is only within 3 fluctuations as per the board lot table. In the new system fluctuations are still based on the board lot but it is not limited to the 3 but it is now based on the set threshold which is either Static or Dynamic which ever applies. 

Thresholds are set to protect the investing public. The system will halt trading if such is breached and will resume trading after look at by the PSE.

Now as per the above implementing regulation, Static threshold is computed as follows:

Upper Static threshold = Yesterday's closing price x 1.5
Lower Static threshold = Yesterday's closing price x 0.5

The above computation sets the price range at which a stock could be traded within that day. So for example if JFC(Jollibee Food Corp.) closing price yesterday was  Php 88.50 then the price range that the JFC could be traded should be within  Php 44.25 to Php 132.75.

On the other hand Dynamic threshold is computed as follows(I took this formula from another forum since the above explanation is unclear due to the clustering it specifies)

Dynamic upper = last traded price + (last traded price x the dynamic tick)
Dynamic lower = last traded price - (last traded price x the dynamic tick)

Dynamic tick size is the allowed fluctuations as per the new Board Lot as shown below:

Thus JFC's dynamic threshold as per the above computation will be:

Dynamic upper = 92.925
Dynamic lower = 84.075

This Dynamic threshold changes every time a new transaction is fulfilled since it is based on the last traded price.

In this regard the rules of board lot fluctuations apply. Thus the number of fluctuations varies as long as they are within these thresholds.

Thus JFC's price should not exceed either of the two threshold or else the market will be frozen and needs reactivation by PSE. Closing price should not exceed the Static threshold of Php 44.25 to Php 132.75 as compared to yesterday's closing price or should not exceed the computed Dynamic threshold at every last traded price..thus the above Dynamic computation only applies to the first trade.

Author's Note: in regards to the dynamic threshold both the Revised and the Implementing Rules and regulation does not show a sample computation thus the author based the above example from what is gathered from other internet sources. 

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