Hard choices
Any transactional system, no matter how sophisticated and modern, has its own limits. The trading system in use on HOSE currently is quite old, so it cannot meet the demand in the context of exponential increase in liquidity at present. In fact, this limit has also been seen before, so there is a new transaction system, KRX of South Korea, set for future operations. Had it not been for the sudden disruption caused by the Covid-19 pandemic in early 2020, and which is still relentlessly continuing, perhaps the new system would have been in place by now.
However, it is needless to blame the pandemic for inadequacies. While waiting for the new system to replace the old, the most important thing is to make sure the market continues to operate correctly and efficiently. Several options are on the table currently. For instance, by raising the minimum trading lot from 10 stocks to 100 stocks and then on to more than 1,000 stocks; increasing the price step from VND 10 to VND 100 or more; move listing of some existing shares on HOSE to HNX; deposit part of stock trading through the trading system of HNX.
The increase of the minimum trading lot from 10 stocks to 100 stocks is being done from 4 January 2021, and according to information from HOSE, it reduces the load by about 15% to 18% on the number of orders. However, transaction congestion still occurs, which shows that the efficiency is not enough. Therefore, raising the minimum trading lot to 1,000 stocks is expected to reduce the load by 40% or 50% of the order volume.
Suggestion to raise the minimum lot from 10 stocks to 100 stocks has drawn harsh criticism. Many people said this solution has deprived the opportunity of trading for small investors. Hence, when raising the minimum round to 1,000 stocks, the public opinion is likely to increase. There are quite a few high value stocks, from VND 50,000 or more, being traded, which means that the minimum amount of capital to buy will also increase and just like the original objection, raising the lot to 1,000 is being considered effective to decrease customers. On the other hand, when some section of investors cannot buy stocks of high market price, the demand will decrease in these codes and can affect price fluctuation.
In fact, raising a trading lot to 1,000 would be more acceptable if there were multiple market price options. For example, if a stock has a price of more than VND 100,000, a minimum lot of 1,000 can be applied, while a stock from VND 50,000 to less than VND 100,000 applies to a smaller lot. The problem arises when stocks fluctuate around the limit, and the rules change. This also increases the load of the trading system of securities companies, and the ability to edit system parameters of companies, which is also problematic, especially when this solution is only temporary.
A step pricing solution is also an option, because technically it does not reduce the total number of orders entered into the system. This option, if available, has another purpose to increase the transaction costs of robotic systems using the arbitrage strategy, and thereby reduce the order placement of this group. However, increasing the step gap also damages all other normal transactions. This is real, direct and immediate damage to all investors, like Forex exchanges do. This solution has long term side effects while also not restricting efficient robot trading by raising the minimum round lot.
Choosing to change stock exchanges is causing certain reactions to the downgrading of listed companies. However, that is only subjective judgment from a few opinions. In order to reverse listing from HOSE to HNX, it is necessary to have the voluntary approval of shareholders, not just through administrative orders. Management agencies are calling for volunteering from businesses, so this solution is not promising in efficiency because the quantity is unknown, not to mention the time will be extended in terms of procedures.
On the other hand, if it is only temporary, after having a new system, the business will move back to HOSE, creating a vicious circle. Actually, the congested trading system only affects the secondary investors who buy and sell every day, while the major shareholders, the business owners, mostly do not care, but they have a decisive voice in the shareholders meeting.
Short term solutions
The most interesting solution is to deposit a portion of the transaction into the HNX trading system. The idea is that some stocks will switch to trading on HNX instead of HOSE and reduce the load evenly by the daily trading size of these codes. The system of the HNX on a trial run could load up to the threshold of 12 million to about 15 million orders, so it is not difficult for the HNX to receive dozens of stocks or hundreds of stocks from HOSE.
However, this solution has some limitations that securities companies have to modify system parameters to send orders to the correct trading floor. The difficulty of placing the role of market member is due to the fact that it is related to margin management. Therefore, securities companies need time to modify system software, and increase costs. If this is just a short term solution, then after the new system is in place it will have to be adjusted again. Not all securities companies are willing to do this. If only a few companies are willing to do it, then it will create injustice in the transaction.
On the other hand, the data linkage between the HNX and HOSE is also a problem. The VN Index represents all stocks listed on HOSE, which includes the number of shares deposited for trading on the HNX. Updating the price data continuously during the session to calculate the VN Index is not possible but can happen only at the end of the day. In particular, stocks in the VN30 cannot be deposited, as it is also related to the underlying index for the derivative market. This will distort the technical analysis based on the VN Index because the opening, closing, highest, and lowest prices are not accurate.
Another very easy option that is being discussed by many is to embrace system bottlenecks at a given point in time, which means that nothing needs to be done at this time, as the new system is under urgent deployment. The reality is that the system has been congested since the end of 2020 and has been so for many months now. The market somewhat self-regulates liquidity and the frequency of congestion has also decreased. Investors can flex when transaction time is not congested, because tens of thousands of billion dong are matched every day.
