FM418-CH3 (1) PDF - The Philippine Stock Exchange

## The Philippine Stock Exchange ### Introduction The Philippines used to have two exchanges: the Manila Stock Exchange established in 1927 and the Makati Stock Exchange in 1963. These exchanges were located a few kilometers apart and had similar trading practices. They both traded the same share...

## The Philippine Stock Exchange ### Introduction The Philippines used to have two exchanges: the Manila Stock Exchange established in 1927 and the Makati Stock Exchange in 1963. These exchanges were located a few kilometers apart and had similar trading practices. They both traded the same shares, highlighting the inherent inefficiencies of having two exchanges. In March 1994, they agreed to a functional unification via a computer link-up, operating a one-price, one market system. ### PSE Structure and Shareholder Protection #### PSE Structure The PSE's organizational structure consists of the president reporting to the board of directors. This board is comprised of seven trading participants (member brokers) and eight independent individuals. As of the end of 2010, there were 184 trading participants, 133 of which were active. These participants include 150 domestic and 34 foreign firms. The PSE is divided into seven major divisions: * Finance & Investment Division * Market Operations Division * Technology Division * Capital Markets Development Division * Issuer Regulation Division * Corporate Services Division * Market Regulation Division The PSE is a self-regulatory organization (SRO), a status granted by the Securities and Exchange Commission (SEC) in 1998. Being an SRO, the PSE has the power to police its own ranks and make its own rules. The PSE regularly conducts audits on member firms for: * Net capital and customer protection examination * Sales practice and business conduct compliance The net capital rule dictates that brokers must have an excess of liquid assets over their liabilities. This demonstrates their ability to promptly settle customer claims and other obligations. The PSE ensures brokers' sales practices and business conduct conform to the "customer first policy" rule, which means brokers must surrender their orders to clients consistent with the Securities Regulation Code. The PSE's SRO status for a brief time in 1999 was suspended after a Best World Resources scandal in which the PSE was accused of being an "Old boys club" that covered for the mistakes of its members. #### Shareholder Protection The PSE's Market Regulation Division detects breaches of trading rules, market manipulation, and insider trading to ensure fair, efficient, and transparent trading on the exchange. The division is responsible for implementing the following: * **Price-freeze rule**: The PSE freezes the price of a security listed whenever it moves up or down by 50% from the most recent closing price or the most recent posted bid price, whichever is higher. Affected shares are only traded at the frozen price. In some cases, the price-freeze rule is waived if the exchange deems such fluctuations justified and the SEC grants its approval. * **Alert Levels**: The PSE establishes alert levels for all listed companies based on price and volume. This helps to monitor and detect unusual movements of shares. The PSE can direct the issuer to make information public that may explain the unusual movement or direct the broker to disclose the beneficial owners of the transactions. Alert levels are categorized as follows: * **Cumulative price alert**: To describe issues that are deviating beyond a variance limit of the cumulative price. * **Cumulative volume alert**: To list issues deviating beyond a variance limit of the cumulative volume. * **Run-off alert**: To list all significant trading activity done proximately a few minutes prior to the run-off period. * **Share concentration alert**: To list brokers with an unusual concentration of trading activity. * **Significant market activity alert**: To list companies with unusually significant market activity based on the firm's statistical average trading volume. Furthermore, investors are protected through another mechanism, the Securities Investor Protection Fund, Inc. (SIPF). The SIPF was established in 1979 with the goal of protecting the investing public from losses in case of fraud, failure, or insolvency of brokers and dealers who are members of the exchange. Contributions to the SIPF come from a monthly assessment of stockbrokers, which is equivalent to a percentage of their gross trading volume of listed securities. ### PSE Selected Market Indicators #### Market Indices The PSE Composite Index, formerly known as Phisix, was renamed to PSEi on April 3, 2006. This coincided with the adoption of the free float-adjusted market capitalization method in index computation. The use of free float levels affords investors a more reliable gauge of trading activity and overall market behavior. To track the performance of specific sectors in the market, the PSE also maintains six sector indices: * Financials * Industrials * Holding firms * Property * Services * Mining and oil The all-share index reflects the performance of all common stocks traded in the exchange. #### PSEi The PSEi is a basket of 30 selected stocks that mimic the overall performance of the stock market. To be included in the PSEi, a listed company must meet five criteria: * Free float level of at least 10% * Liquidity (average daily trading value of at least PhP5 million) * Volume turnover ratio of at least 10% of the company's free float shares * Tradability of at least 95% of the days the shares are eligible for trading. * Rank based on free float-adjusted market capitalization The Free float market capitalization is computed using the volume-weighted average price of a listed stock over the past review period. Companies that meet these four criteria are ranked from highest to lowest based on the free float-adjusted market capitalization. Their final selection is done in two stages: * In the first stage, the two highest-ranked companies from each of the six sectors are selected, filling the first 12 spots to ensure sector representation. * In the second stage, the 18 highest-ranked companies among other qualifiers fill the remaining slots. #### Market Size As of the end of 2010: * There were 253 listed companies. * 328 issues were traded on the exchange. * Market capitalization was a record PhP8,866 billion. * Total value traded was PhP1,207.4 billion. A summary of selected PSE market indicators from 2006 to 2010 can be viewed in Table 3.1. ### Largest Quoted Companies At the end of 2010, the top 10 companies accounted for approximately 51% of the total market capitalization. A list of these companies in terms of their market capitalization is shown in Table 3.2. #### Market Capitalization by Sector The financial sector accounted for 32% of the total domestic market capitalization in 2010, followed by the industrial issues at 28% and the services sector at 13%. ### Actively Traded Shares The top 10 actively traded stocks in the PSE for the month of December 2010 are shown in Table 3.3. Note that trading in the top 10 companies accounts for roughly 40% of the PSE's total value turnover for the period. ### Additional Listings Capital raised in the Philippine Stock Exchange peaked at PhP90 billion in 2007. The global financial crisis that followed severely affected capital raising activity during the next two years. In 2010, the market experienced a strong recovery, ushering in the debut of five companies including Cebu Air, Inc. in October, and Nickel Asia in November. ### Listing Procedures and Initial Public Offering (IPO) An Initial Public Offering (IPO) is a company's first offering of shares to the general public. This usually involves new primary common shares (unissued shares) and sometimes secondary shares (shares owned by present stockholders). IPOs are required to list on the PSE. #### Pros and Cons of Listing on the PSE * **Pros**: * **Capital Source**: Listing on the PSE opens up a good source of capital for expansion. * **Image Building**: Listing helps to build a positive image for the company. * **Lower Transfer Taxes**: Listing can lower transfer taxes. * **Market-Driven Valuation**: Listing helps to achieve a market-driven valuation for the firm's assets. * **Transparency**: Listing requires transparency in operations. * **Shareholder Protection**: Listing aims to protect the interests of shareholders. * **Cons**: * **Annual PSE Fees**: Listed companies must pay annual PSE fees. <start_of_image>* **Steps to Listing**: Listing on the PSE requires a new applicant to complete the following steps: * **Listing Agreement**: The applicant completes the listing agreement and fulfills the requirements for listing. * **Evaluation**: The listing committee of the PSE evaluates the application. * **Board of Directors Approval**: The application is endorsed by the Board of Directors. * **SEC Approval**: The application is endorsed to the SEC for final approval * **Listing Orders**: The SEC issues the listing orders. The overall IPO process typically takes six months and involves the financial advisor at every stage. #### Short-Cuts to Listing Some companies elect to "short-cut" the system by buying and reorganizing a listed company. This effectively bypasses the IPO process, saving both time and money (also known as back-door listing). For example, the dormant mining firm REDECO was purchased and transformed into a manufacturing company. This company was named WIN. There was also an inactive textile company named Ramitex purchased via the "backdoor", eventually morphing into Gaming and Information Technology, and later becoming Greater Resources Corp., and finally being named Best World Resources. #### The Underwriter in the IPO Process The appointment of an underwriter is an important stage in the IPO process. The underwriter is instrumental in reviewing the organization of the company, formulating its business plans, evaluating its viability, and designing the terms of its offering. The underwriter produces a prospectus (a printed statement containing material facts about the applicant's operation, including risk factors, use of proceeds, terms of offering, financial statements and projections). The prospectus is a major output of the underwriter's undertaking. After receiving clearance from the SEC and PSE to sell shares to the public, the underwriter markets the company via public presentations and sales calls (road shows) and monitors investor commitment (book building). Shares are likewise offered to sales agents (trading participants), small investors, the general public, and investment banks. The distribution of shares is allocated as follows: * 10% to small investors * 60% to the general public * 30% to investment banks. #### Listing by Way of Introduction An alternative way to list shares in the PSE is Listing by Way of Introduction (LWIO). Under this method, the shares are listed before being offered to the general public. The rationale is that the shares are already held by over 20 investors. This process requires the company to meet one of the following criteria: 1. The company is already listed on another exchange or plans to list simultaneously on the PSE and another exchange. 2. An unlisted subsidiary of a listed company becomes widely held by declaring a property dividend which is distributed to the shareholders of the listed company. 3. A holding company is listed in place of a company or several companies that are delisted at the same time. 4. The company is mandated by law to offer its shares to the public. This usually involves congressional franchises. This category includes airline companies and commercial banks graduating to universal banks. 5. The company is registered with the Board of Investments, Philippine Economic Zone Authority or similar Government agencies and is mandated by law to offer its shares to the public in return for registration benefits. Companies that meet criteria 4 and 5 must offer their shares to the public within one year of listing via LWIO. ### Mechanics of Trading #### Background Membership on the exchange is known as having a "trading right", with each broker having a designated initial for posting trade orders. Trading takes place through the use of the PSE Trade Workstation. This system replaced the "Mark Trade" system in July 2010. The PSE Trade Workstation is a fully automated screen-based system that allows continuous order matching based on Price-Account Type - Time Priority. The new system is enhanced for full market visibility and configuration flexibility. #### Trading Flow at the PSE After opening an account with a registered broker dealer, an investor can place an order via telephone, the internet, or by visiting the broker. On the day the transaction is consummated, the settlement of cash and shares takes place on T+3 (three trading days). Only member brokers are allowed to trade on the exchange. Trading flow is shown in Table 3.4. The trading flow for bonds is basically the same, except that the Registry of Scripless Securities (ROSS) serves as the depository for bonds. Settlement for bond transactions takes place the same day, known as T+0. #### Settlement and Transfer The settlement of transactions is scripless and based on the Book Entry Settlement System (BES). The BES allows for a change in ownership via a computerized accounting system without the physical handling of certificates. This procedure eliminates the 27-day waiting period for issuance of certificates. Transactions on the exchange are settled T+3, meaning transactions completed on a Monday are settled on Thursday. Investors buying on a Monday will need to pay their brokers on Thursday, while sellers on a Monday will have to wait until Thursday to be paid. Stock positions are updated electronically, without the issuance of certificates, on T+3. In some cases, physical certificates are issued only upon request for PhP 165 per certificate. For bond trading, settlement is done during the same day (T+0). #### Securities Clearing Corporation of the Philippines (SCCP) The SCCP ensures payment from the buyer and that the seller's shares are deposited accordingly by brokers. The SCCP informs PCD (Philippine Central Depository-custodian/depository of scripless shares) and Settlement Banks in case of a procedural failure. Once the transaction is cleared by the SCCP, the PCD deducts shares from the selling broker's security position and credits shares to the buying broker. The settlement bank then pays the selling broker electronically using the sales proceeds. ### Trading Hours The PSE trading cycle starts with pre-postings at 9:00 am during which orders are accepted but no matching takes place. This pre-posting is done to determine the opening prices for all securities. Actual trading commences at 9:30 am. Trading ends at 12:00 noon with a 10-minute extension. The 10-minute run-off period runs from 11:59 am to 12:00 pm and allows trading to continue but only at the last traded prices. Trading takes place from Monday through Friday. ### PSE Market Phases The PSE market has a series of phases: | Phase | Description | |---|---| | 9:00 - 9:15 | Pre-Open | No matching occurs during this phase and traders can enter, modify, or cancel orders. | | 9:15 - 9:30 | Pre-Open | Traders are allowed to enter orders but are disallowed to modify or cancel orders. | | 9:30 | Opening | Opening price determination takes place. | | 9:30 - 11:57 | Trading | Orders are queued and/or matched. | | 11:57 - 11:59 | Continues Trading | Same as Market Pre-Open | | 11:59 - 12:00 | Trading | Traders are allowed to enter orders but are disallowed to modify or cancel orders. | | 12:00 | Closing | Closing Price Determination | | 12:00 - 12:10 | Closing | Traders can enter Limit Orders only at the closing price.| | 12:10 | Market Close End - of-Day | | ### Trading Floor There are two trading floors: * **PSE Center**: This floor is located in Ortigas. * **PSE Plaza**: This floor is located in Makati. Both floors are covered with electronic boards. The most prominent of these is the bid board for issues with a track record of dividends, as well as a smaller board for issues that have not yet declared  dividends. Eventually, successful companies will migrate from the smaller board to the larger board (an example of this was JFC). The trading terminal of the PSE also provides an odd-lot board for issues that are not traded within the prescribed minimum lots. Other information is available, such as statistical information about dividend announcements, corporate disclosures, foreign exchange, international stock market indices. ### Price Fluctuations and Board Lots Normal Equity Market trading is done by board lot or round lot system. The minimum number of shares that can be purchased or sold at a specific price range is determined by the board lot table. The number of shares one must buy or sell varies depending on the market price of the stock, as well as its corresponding board lot. Prices of the stocks move through a scale of minimum price fluctuations. Odd Lot Market trading takes place when the volume and quantity of shares traded is less than the defined board lot. Both markets are defined separately and are independent of one another. Table 3.5 shows the minimum board lot table. ### Types of Orders The PSE Trade Workstation accepts the following orders: * **Day Order**: Good for a particular day. * **GTC Order (Good Till Cancelled)**: Good until cancelled by the user or until the instrument's expiration date is reached. * **GTD Order (Good Till Date)**: Remains valid until the specified date. * **GTW Order (Good Till Week)**: Valid for seven calendar days from the time of posting. * **Sliding Validity**: Good for 360 calendar days. * **FAK Order (Fill and Kill)**: Orders are executed and the remaining unexecuted portion is eliminated. Lot sizes can take two forms: 1. **Regular Order**: Conforms to the minimum shares based on the price in Table 3.5. 2. **Odd Lot Order**: Any transaction that does not conform to Table 3.5 and takes place on the PSE odd-lot trading board. #### Most Common Order Types Most PSE trades fall under one of the following order types: * **Limit Order**: An order to buy or sell securities at a specified volume and price with any unexecuted portion added to the Central Book Order at the entered limit price. *Example*: An investor places an order to buy 1,000 shares of SM Investment at PhP 300. If the price of SM Investment goes up to PhP 302, the order will not be completed because of the limit imposed by the investor. * **Market Order**: An order to buy or sell securities without a specified price. The shares are executed at the best bid-offer price or last traded price, whichever is better. *Example*: If an investor wants to unload 100,000 shares of ABS-CBN currently trading at PhP 24.00, but only 50,000 shares are being offered at that price by buyers, the broker will sell at the next lower price fluctuation (e.g. PhP 23.95) to ensure the investor's order is completed. * **Market-on-Opening/Closing Order**: An order to buy or sell securities at the indicative opening/closing price. This order has no specific price, and the price is determined during the pre-opening/closing phase. This order type can only be accepted during the pre-open and pre-close periods (*Example*: An investor wants to buy 1,000 shares of GMA at the opening price of PhP 9.80). * **Market-to-Limit Order**: An order to immediately buy or sell securities at the best possible price between the best bid-offer and the last traded price, with any unexecuted portion automatically transformed into a limit order at the executed price. *Example*: An investor wants to unload 10,000 shares of EDC last traded at Php 5.20, with 5,000 shares posted buying at PhP 5.10. Only 5,000 shares would be sold at PhP 5.10 and the balance posted at the same price. * **Stop Loss Order**: An order that stays inactive until a trade occurs at a predetermined trigger price or better. This type of order is designed to automatically minimize downside risk. *Example*: An investor bought MPI at PhP 3.60 and places a stop-loss order for PhP 3.30. The order will only be activated in the event the price of PhP 3.30 is reached. In this case, the investor's position would be sold. * **Stop Limit Order**: An order that stays inactive until there is a trade at two specific prices: the predetermined *trigger price* and the *limit price*. The limit price must be equal to or better than the trigger price. *Example*: An investor investing in FLI sets a trigger price of PhP 1.00 and a limit price of PhP 1.00, while currently trading at PhP 0.90. If the price of FLI reaches PhP 1.00, the broker will purchase the shares at a price of PhP 1.00 or better. Other order types include: * **Volume Qualifiers**: With a minimum order quantity that, if not met, the order is eliminated. * **Iceberg Order**: Orders that are successively entered and disclosed at specified tranches. ### Cross Sales and Block Sales A **cross sale** occurs when one client is buying and another is selling securities at the same price. The transaction is immediately completed. **Block sales** take place when there are a large number of shares that are pre-negotiated at a specific volume and price. * **Ordinary Block Sales**: Orders must have a minimum transaction value of PhP20 million and are transacted at a negotiated price within +/- 5% of the Last Adjusted Closing Price (LACP) of the security to be traded. * **Special Block Sales**: These sales involve a minimum transaction value of PhP 50 million, which is approved by the PSE prior to execution. These sales can be priced beyond the +/- 5% of the LACP. Both block sale types can be executed from the Market Pre-Open to the Trading-at-Last/Run-off period and are settled within the execution date (T+0). ### Short Sales A **short sale** is the sale of securities not owned by the seller, with the hope of purchasing the same security at a later date to lock in profits. Short sellers first deliver borrowed certificates and make the purchase at a later date to cover these certificates. It is prudent to sell a security short at a higher price and cover the purchase at a lower price. *Example*: If you sold BW short at PhP 100.00, it would be prudent to cover the purchase by borrowing first and then buying the shares at a later date at PhP 1.00. The SEC approved the Revised PSE Rules on Short Selling in October 2007. These guidelines state that only securities included in the list of qualified securities, as determined by the Exchange, are eligible for short selling. These qualified securities must meet the following criteria: 1. **Market Capitalization**: At least PhP 10 billion 2. **Tradability**: Traded 100%, excluding block sales, during the last six months prior to the date of approval of the list. Securities automatically considered qualified are those already listed, as well as all constituent stocks of the PSEi where derivatives products are issued. All short sale transactions must be executed following the "Up Tick Rule". This rule states that no trading participant may use the facility of the Exchange to effect a short sale of any security unless the transaction is: 1. At a price higher than the last sale price, or 2. At the price of the last sale if and only if the price is above the next preceding different sale on such day. ### Margin Trading Margin trading is the purchase of stocks partly financed by the brokers using the purchased stocks as collateral. The agreement enables the client to purchase an extra amount of shares in credit while at the same time exploiting bargain prices. Brokers charge interest on the debt balances with a spread above the bank's lending rates. If the market value of those purchases declines, the investor will be required to deposit additional margin (cash or stocks). ### Price Determination The opening price (9:30 am) is determined using the following rates: 1. **Price with the maximum number of shares matched** 2. **Price with the minimum number of shares unmatched** 3. **The highest (lowest) price if the market pressure is on the buying (selling) side** 4. **Price closest to the reference price (e.g. previous close)** 5. **Reference price** Essentially, the price is based on the trade that provides the greatest liquidity. The rules for determining the closing price are the same as the rules for the opening price. However, the last traded price of the continuous trading is used as the reference price, as opposed to the previous day's closing price. Table 3.6 shows the pre-posting bid and offer volumes for Energy Development Corp. (EDC) from 9:15 to 9:29 am, with the opening price of EDC at PhP 5.20 shown in Table 3.7. ### Trading Costs The stockbroker's commission ranges from 0.25% of the value of the transaction below PhP 100 million, to a maximum of 1.5% of the transaction cost, for both buying and selling transactions. A minimal fee for SCCP is also collected. Under the National Internal Revenue Code of 1997, dividends received from domestic corporations are subject to a withholding tax of 10% if the recipient is a citizen or resident alien and 20% if the recipient is a non-resident individual engaged in trade or business in the Philippines. Dividends received by domestic and resident foreign corporations are not subject to tax. ### PSE Moving Forward The board of directors of the PSE approved the extension of trading hours. Starting October 1, 2011, trading will continue until 1:00 pm. By January 2012, the schedule will change to 9:00 am - 12:00 noon for the morning session and 1:30 pm - 3:30 pm for the afternoon session. Another recent positive development in the PSE is the proposed merger of the equity and bond markets that are currently operated by the PSE and PDEX, respectively. This move is seen to enhance liquidity and improve the fund-raising ability of the market. The initiative has been backed by the Bangko Sentral ng Pilipinas and the Department of Finance.