The change in spreads, in theory, offers greater flexibility for investors and more realistic pricing of stocks. For example, shares in a penny stock like SSI, which closed yesterday at Bt2.80, would rise by a minimum of 3.57% under the current trading system. If SSI’s price increased by two spreads or Bt0.20, the gain would be a more substantial 7.14%.

Such a system, is evidently open to abuse and encourages outright speculation as well as manipulation. In recent stock market rallies, low-priced stocks have often outperformed more expensive blue chips as it is easier to push up prices of stocks trading under Bt10.

Under the new rules, SSI could rise or fall by a minimum of 0.36%. It could still rise to a 30% ceiling price of B3.64 but this would require 84 incremental increases of Bt0.01 each. For BECL, which today was trading at Bt9.9, it would require 297 spreads for the stock to hit ceiling.

The major disadvantage of the new system is that speculators, seeing their diminished chance of turning a decent profit, will reduce their trading activities, leading to lower liquidity for the Thai market. With 70-80% of market players being retail investors, the threat to trading liquidity cannot be ignored.

Marketing staff at brokerages also say the chances of keying in the wrong orders for clients sharply increases under the new spread system. Brokerage computer systems would also need to be changed as at present they only show three spreads higher or lower than the current price.

The changes to the trading system have already provoked complaints from investors and brokerages and there are rumors in the market that the SET may backtrack on the reforms. While we support the SET’s effort to crack down on manipulation, we believe the thinner spreads are impractical and will need to be re-assessed.

On a related note, the SET armed itself with new powers yesterday to curb suspicious share price movements. If the SET finds abnormal movements or volume in a stock, it can now order brokerages to ban customers trading via net settlement or on margin in that stock. The SET can also prohibit short sales in stocks showing irregular price movements.