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What happens to the overload of stock order placing
By Hai Ly
Sunday,  Mar 7, 2021,14:18 (GMT+7)

What happens to the overload of stock order placing

By Hai Ly

Following mergers, disbandment and transfers, the number of securities companies listed on the HOSE has dropped by nearly one-third, totaling only 74 now - PHOTO: TRAN NGOC LINH

The overload of order placing on the Ho Chi Minh Stock Exchange (HOSE) has become a nasty daily routine as investors’ trading demand exceeds the design capacity for daily order processing of the entire system. Subsequently, system changes are imperative, but to understand how investments in the upgrade of a new system will affect the market, it is necessary to capture the essence of the existing system.

When it comes to seniority, the HOSE’s trading system is more than 20 years old. Prior to the opening of the HCMC bourse on July 20, 2000, the system had been installed and given a trial run, constantly tested and re-tested for years. Back then, to lessen the burden on the central budget, the State Securities Commission of Vietnam (SSC) appealed for and received aid from Thailand. That said, the HOSE’s trading system is not of a Thai product.

The design of this system originated in the United States, the stock exchange of Chicago to be more precise. In the 1980s, Chicago was the pioneer in the development of automated order-matching systems. The Stock Exchange of Thailand acquired the Chicago solution for their own use and development of their own technology team to further intervene in the system. When Thailand agreed to support Vietnam, a tripartite agreement came out: the Chicago-based copyright owner, DSTi, allowed Thailand to extend support to the HOSE, technically giving Vietnam a user license. When applying this system, Thailand adopted a separate coding board for the activities of foreign investors. Since Vietnam does not treat transactions by domestic and foreign investors differently, this component was omitted.

The design principle of the aforementioned system puts forward an order allocation mechanism that ensures optimal use of the system’s resources (capacity) and self-protection. In case the trading system of a member securities company failed, sending a series of incorrect orders to the exchange in the process, which could be severe enough to crash the general system, then the number of errors would be restrained within the limit set for that company, without affecting other members.

As noted by the author, during its early years of operation, the HOSE once had 105 member securities companies at its peak. The system allocates 3,000 orders to each member, which means 315,000 orders at maximum can be processed versus the exchange’s total capacity of 900,000 orders. Following mergers, disbandment and transfers, the number of securities companies listed on the HOSE has dropped by nearly one-third, totaling only 74 now. Though the other 31 companies have gone, their transaction IDs remain and cannot be deleted, i.e. 93,000 design orders (more than 10%) are left unused. Why can’t they be deleted? It is because once they are, the order of other IDs will be disturbed, leading to the need for alterations in member codes and investor account codes.

Derivative market: the one to blame

In addition to the fixed number of 3,000 orders each securities company is given, the system distributes the remaining orders to its members based on the average number of orders within 30 trading days per member. Securities companies whose market shares are bigger are allocated more and vice versa.

Meanwhile, for the past 15 months, the derivative market has stepped up its activities and been taking up more of the general number of orders in the HOSE’s system. Taking advantage of the stock quote too tiny and the lot too modest (10 units, prior to January 1, 2021), arbitrage investors have kept scattering orders with the slightest lot and quote. An accurate calculation of how many percent of the HOSE’s trading capacity is scattered orders is not available now, but the consequences of such practice may be ultimately destructive. It has triggered an unhealthy competition for market share among securities companies.

Some securities firms have been applying zero transaction fees (except for the 0.03% they are required to submit to the HOSE according to regulations) in an attempt to attract investors. Having to pay no fees, investors on the derivative market have indiscriminately scattered their orders onto the underlying market of the HOSE. Once the orders are placed, if finding them not matched, they may cancel or correct them at will, making the overload worse. This is the main reason why there are some securities companies whose derivative brokerage makes up nearly 50% of the derivative market as a whole. In fact, despite an increase in their brokerage market share, there is no real demand created.

The odd lot problem

South Korean experts who have come to assist the HOSE in testing the new system, which is scheduled for official operation in the third quarter of 2021, are still being quarantined as per measures against Covid-19. Waiting for the new system to come on stream is not a problem. The greater concern is quite a few investors are afraid that transactions do not reflect the real supply and demand of the market as the buy and sell orders are not thoroughly processed every day.

The HOSE is considering temporary solutions like expanding the stock lot and the stock quote. Another solution proposed by many actors in the market is to raise the standards of listing on the HOSE. Especially, the minimum charter capital and operational efficiency both need a boost to filter out poor-quality stocks. Currently on the HOSE, there are quite a few high-liquidity stocks, tens of millions of which are matched every day, yet their quality is inferior as far as the basic financial criteria are concerned.

Besides, when the stock lot is expanded, it is necessary to solve the problem of odd-lot stocks for investors. At present, there is no odd-lot trading board on the HOSE (whereas there is one on the HNX). Odd lots of stocks are mainly bought back by securities companies from their customers, but these firms often buy them at floor prices and do so when the market is lukewarm. The HOSE plans to set up an odd-lot trading board, according to which it may petition for trading at the closing price with a certain degree of fluctuations acceptable, trading 15-30 minutes per day and matching once.

A simpler measure may refer to dealing with odd-lot stocks making use of a regulation brought in by the SSC. For example, a securities company may buy odd lots at the closing price or the reference price without the need for a separate board. What matters is how to satisfy the needs of investors to enable them to buy and sell when they wish to avoid distorting the market.

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