Published On: Tue, Sep 16th, 2014

SGX Study Finds Positive Correlation Between Higher Trading Prices And Liquidity, Market Depth

Magnus Bocker CEO of SGX -

Magnus Bocker CEO of SGX –

Numerous studies show that stock price is an important function of liquidity, a major component of market quality. Low-priced securities are generally associated with the risk of high volatility, making them more susceptible to excessive speculation and market manipulation, while higher-traded prices are associated with greater liquidity and market depth.

Recently, Singapore Exchange (SGX) conducted a review of the market quality of the SGX securities market in 2013. SGX’s study investigated if a higher level of market quality was observed at different levels of 2013 trading prices of Mainboard and Catalist stocks, using bid-ask spreads and quoted best depth value to assess market quality. These two liquidity measures indicate the implicit trading costs faced by investors. A lower implicit trading cost ensures that investors will achieve a better quality of execution, which points to a higher quality market.

SGX would like to share the following key findings from the study:

• Stocks priced above S$0.25 were quoted with narrower bid-ask spreads and higher quoted best-depth value. This shows that trades at S$0.25 or greater display higher levels of liquidity or market quality.
• Stocks trading at less than S$0.05 and at S$0.25 or greater exhibit tighter bid-ask spreads, suggesting lower trading costs.
• Conversely, those stocks that traded at prices between S$0.05 and S$0.25 were found to be largely illiquid. They typically traded at wider bid-ask spreads during the trading day and even had one-sided order books, making it difficult for investors to close out their open positions.

Full study could be found here.

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