By Alexandria Grace C. Magno
The Philippine Stock Exchange's (PSE) proposal to adopt one-share board lots and modify run-off and trading-at-last rules could broaden retail participation, though analysts warn the changes could also lead to fragmented liquidity, execution challenges and higher operating costs for brokers.
“Theoretically, allowing investors to purchase a share improves access and aligns the PSE with global practices, especially as digital platforms attract younger, smaller investors,” said GlobalLynx Securities & Stocks, Inc. Toby Allen C. Arce, head of sales at Apple Inc., said in a Viber message.
“However, the risk of fragmented and volatile trading in trade-offs is high, as the order book may be crowded with very small orders, which adds noise rather than depth,” he said.
In December, the PSE issued proposed changes that would standardize the minimum lot size on a share for all listed securities, regardless of price. As part of the exchange's broader trading system upgrade, the move will effectively eliminate the odd-lot market and reduce the minimum capital required to purchase any stock.
Mr Arce said overall participation may increase, but the quality of liquidity may deteriorate initially, especially in less traded stocks where wider bid-ask spreads and sharp price movements are more likely.
“Much will depend on how brokers implement minimum order value policies and how quickly market participants adapt their order-routing and aggregation strategies,” he said.
Under the proposed amendments, the revised board lot will reduce the minimum investment for any security to its market value.
“The proposed board lot will allow investors to trade one share of a security and will effectively reduce the minimum investment for any security to its market value, thereby making stock market investments more affordable and accessible to retail investors,” PSE said.
Juan Paolo E. Collet, managing director of China Bank Capital Corp., said uniform board lots would transfer all trades to the regular market, eliminating inefficiencies associated with odd-lot transactions.
“Trading participants are allowed to set a reasonable minimum order price, so the rule change is a win-win for both brokers and small investors,” he said in a Viber message.
Mr. Collett said that by consolidating liquidity in the regular market, the offer could eliminate the price distortions and wide bid-ask spreads that typically characterize odd-lot trades.
To address the concerns of trading participants whose business models may not be compatible with the one-share structure, the PSE said brokers may impose minimum order values when accepting client orders. This provision is meant to offset the higher processing costs incurred from handling many small-value trades, especially for companies focused on institutional clients.
The exchange said any minimum order value should be implemented without exceeding the commission limits under existing laws and regulations.
Mr Arce said that while the change could help attract first-time investors and increase retail activity, it was not a complete solution to boosting market participation.
He said that if brokers set minimum order prices too high, access benefits could be reduced, while setting them too low could create operational inefficiencies and weak per-trade economics.
“Over time, the recovery could shift retail behavior toward more frequent but smaller trades, which could boost headline trade counts but not necessarily increase value trades,” Mr Arce said.
BDO Securities also said it does not expect the proposed changes to cause major issues, especially in terms of retail participation, noting that the removal of odd lots could increase transaction volumes without increasing the peso turnover value.
“Overall, the Philippine stock market is not performing well, which has led retail investors to turn to other forms of investments outside the PSE,” it said.
It said institutional clients generally regard odd-lot trades as insignificant, but brokers will need to update systems to support the structure. These upgrades “will involve additional costs, which will vary from broker to broker.”
The board lot offering coincides with PSE's move to Nasdaq Eclipse trading. The exchange said it has completed a detailed interoperability analysis comparing Nasdaq Eclipse Trading with PSETrade XTS in operational, functional and regulatory requirements.
One difference identified involves trading during the run-off or final period. Under PSEtrade XTS, incoming orders are rejected if the counterparty order price is more favorable than the established closing price.
PSE noted that under Nasdaq Eclipse trading, orders priced at the closing price will be accepted and matched at that level, even if an existing order is priced more favorably. This facilitates more trading at closing without incurring losses to investors whose orders are executed at the closing price.
Mr Arce said the combined effect of broker-level minimum order values and revised run-off trading rules could complicate the execution of institutional and end-of-day rebalancing trades.
“In the medium term, the success of these reforms will depend on calibration – how minimum order prices are set, how brokers optimize execution models and how effectively the PSE balances inclusivity with market efficiency as it transitions to a more technologically advanced trading environment,” he said.