FSC Vice Chairman Cheng-Mount Cheng
How Can TAIEX Overcome Low Trading Volume?
Although Taiwan stock exchange index had a strong showing in 2016, turnover and trading volume have hit a record low. In this interview, FSC Vice Chairman Cheng-Mount Cheng discusses what can be done to heal the market’s ills.
How Can TAIEX Overcome Low Trading Volume?By Peihua Lu
From CommonWealth Magazine (vol. 613 )
Sluggish trading volume over the Taipei Stock Exchange (TAIEX) has placed financing barriers in front of listed companies. Cheng-Mount Cheng, vice chairman of the Financial Supervisory Commission (FSC), says that the FSC’s short-term approach is focused on reviving the market, while over the middle and long term it seeks to strengthen the TAIEX’s harmonization with the international environment. Following is CommonWealth’s exclusive interview with Cheng, excerpted and edited for clarity and brevity.
CommonWealth (CW): How can the Financial Supervisory Commission (FSC) resolve the problem of TAIEX’s low trading volume?
Cheng: TAIEX trading volume has diminished, and generally speaking foreign investors with bottomless pockets are the ones buying the large-cap stocks. In the past, Taiwanese investors preferred small-cap stocks, as investors are used to short-swing trading, and small-cap stock prices are more variable as a rule. So why aren’t investors buying small-cap stocks now?
First, I don’t believe it’s due to tax reasons. The 0.3 percent tax on securities transactions has never changed, but securities brokerages want to adjust the rate on day trades to 0.1 percent, a concern that we have communicated to the Ministry of Finance. Second, some stock prices are on the high side at the moment, and at 1,000 shares per unit may be out of reach for young people to buy. Through a dollar cost averaging approach, we can lower the threshold for new investors.
At the same time, we encourage peripheral FSC agencies to invest a portion of their funds in the stock market.
Another matter is that investors have more choices these days. Whereas in the past all they could do was purchase TAIEX stocks, now they can buy bonds, options, and overseas stocks, so the exchanges need to improve their competitiveness in various ways, such as extending transaction time, or moving from call action to trade by trade settlement.
However, there is very little consensus among brokerages these days. With low trading volume, small-cap brokerage firms consider those various methods to stimulate transaction -- such as extending work hours, raising wages, and spending money to improve their data systems, will only raise costs to untenable levels.
CW: Why hasn’t the trading volume increased?
Cheng: After trade-by-trade settlements were instituted, priority was given to the large volume of overseas investors, who also benefit from more favorable transaction prices, making prices higher for individual or retail investors, who must also sell cheaper. Some studies show that transaction volume will drop over the short term due to the withdrawal of retail investors from the market.
CW: We have seen that investors are treating stocks more like bonds, causing a slowdown in turnover. Will this be a long-term trend?
Cheng: Why should the government be concerned about the turnover rate? The government cares about whether investors are given safeguards, and no one wants to see something like the XPEC Entertainment scandal happen again. The government’s role is to maintain market order.
Next, we are concerned with whether companies can raise capital after being listed on the stock market. If an enterprise gets listed but only sells a few lots of stocks, it defeats the purpose of being listed.
But we also need to ask companies, why has trading slowed down to just a trickle of a few lots? Any decent company should be able to maintain a certain volume of transactions. The NASDAQ exchange even requires companies to maintain volume above a certain threshold or face the threat of getting de-listed.
Boosting Market More Urgent
CW: Should Taiwan promote a delisting buffer mechanism?
Cheng: Right now, businesses aren’t interested in delisting, and we don’t want to force things. It is always best to promote a policy when there is less resistance to it.
What we want to do at present is boost the market so companies can find ways to save themselves. Taiwanese businesses have introduced treasury shares in the past, which is one method. In the United States, publicly traded companies contract with financial institutions so that, when listed company trading volume is too low, the financial institution swoops in to shore up the market, and the listed company pays a commensurate commission. But such approaches are the business of those parties, not the government’s.
CW: Why is the FSC encouraging day trades? Opinion seems to interpret this as encouraging speculation.
Cheng: We want to see healthy trading volume on the market, and the current volume is insufficient to sustain so many brokerages. Healthy trading volume can help keep brokerages afloat.
The stock market needs all types of short-swing and long-term investors, and day trading can help boost the market and drive non-day trade investors into the market and stimulate market fluidity. Compared with the volume of day trades on the European, U.S., and Japanese stock markets, which accounts for around 40 percent, at less than 10 percent on Taiwan’s market, there is no need to worry about speculation.
CW: What mid-, and long-term measures does the FSC have for a sound capital market?
Cheng: The FSC will boost promotion of the TAIEX, including the listing of quality Taiwanese and foreign companies. The Taipei Stock Exchange and the Taipei Exchange (TPEx) encourage listed Taiwanese companies to hold performance updates, and seminars on attracting overseas investment are jointly held by the TPEx and securities brokerages. We must first of all inform people about the advantages of Taiwan’s stock exchange and investment targets; unless we can expand participation from the international market, the Taipei Stock Exchange will become an endangered species.
Translated from the Chinese by David Toman