Shedding light on ‘The dark side’

This pertains to the article published at Philequity Corner at The Philippine STAR entitled “The dark side”, written by Mr. Valentino Sy and published on April 14, 2014. Please allow us to shed some light on the broker anonymity plan of the Philippine Stock Exchange to clarify the issues pointed out in the said article.

The discussion of broker anonymity in the context of high frequency trading (HFT) serves to confuse the two financial market concepts as being related when they are not. Amidst the ongoing debate on the merits and demerits of HFT, it is a fact that market participants are constantly pursuing technological innovations for their trade transactions towards more efficient and faster processes. The controversy and issues surrounding HFT, which are trades executed through super-fast computers, are not relevant to the broker anonymity policy of market operators.

Simply put, “broker anonymity” is the global best practice and convention of not disclosing the broker identifiers or broker IDs (i.e., the unique numerical identifier assigned to each broker for identification purposes) for trades already done or matched at public markets like the PSE. We note that at present, orders posted at the PSE do not show broker identifiers while those orders which have been matched show which brokers, through broker IDs, transacted the matched order both on the buy and the sell side. Hence, under a system adhering to broker anonymity, the brokers involved in a matched trade will also not be displayed to anyone.

Studies have shown that removing broker identifiers has had the effect of minimizing spreads which is one of the desired goals of any market. With lower bid-ask spreads, costs of transactions are minimized and the benefits redound to all types of investor, including both retail and institutional investors.

Broker anonymity discourages and limits the herding mentality of investors. When broker IDs are displayed, investors can just follow the orders of big brokerages which may unnecessarily cause more volatile movement in stock prices thereby increasing execution costs.

Contrary to the view that removing broker IDS makes for a less transparent market, broker anonymity can actually promote price transparency. Because investors are no longer worried about the price impact of their orders, investors can place their orders in the market with greater confidence of not worrying about facing higher execution costs. The natural effect that this can achieve is faster execution of trades and more liquidity in the market.

On the discussion in the article that anonymity encourages front running, we note that the two subjects are mutually exclusive. From a regulatory perspective, we would like to stress that the Capital Markets Integrity Corporation (CMIC), the independent regulator of brokers and a wholly-owned subsidiary of PSE, has strict rules on front running under its customer-first policy rules. With or without broker anonymity, this policy is maintained and carefully monitored.

Related to this, we would like to highlight that broker anonymity will address the tendency of market participants to herd instead of making independent trading decisions based on their own analysis. Such fundamental information is available to all through the PSE website and our newly-launched Electronic Disclosure Generation Technology (PSE EDGE) which is our disclosure system. PSE has made this more accessible to the investing public by providing the PSE EDGE mobile application which is free of charge. As a matter of policy, this is how a market operator can encourage a level playing field for all investors and not by providing information on broker IDs.

While the article mentions markets such as Indonesia and Spain as not being broker anonymous, it fails to mention that all other ASEAN markets such as the stock exchanges in Singapore, Thailand, Malaysia and Vietnam, are in a broker anonymous environment not to mention that many markets in Europe also adopt broker anonymity. In addition, stock exchanges in the US, Japan, Australia and New Zealand also provide broker anonymous platforms. The article also mentioned that “Hong Kong, one of the most liquid markets in Asia, also does not practice broker anonymity”. The reality is, Hong Kong does not display broker identifiers for matched trades which is the same environment that the PSE is pursuing. This information has been verified with the Hong Kong Exchange and Clearing Limited. Many of these markets, needless to say, are in a more advanced stage than our market with sizes also significantly bigger than ours and it is prudent for the PSE to learn from their experiences.

Indonesia and the Philippines are the only ASEAN exchanges that still do not have broker anonymity and we have remained behind our counterparts in Singapore, Malaysia and Thailand in terms of market size. And contrary to what was cited in the report, we are proud to say that we have significantly caught up with the liquidity levels in Indonesia and their liquidity level is definitely not ten times more than ours but is in fact now just less than double ours.

Consistent with our earlier announcements on this topic, the implementation of broker anonymity will not have any impact on the market surveillance functions of the CMIC and the Securities and Exchange Commission. Ensuring the integrity of the market is at the core of the functions of the Exchange. WE institute different measures and use the latest surveillance technology and practices to ensure that we are up to speed with best practices. In 2012, the PSE took the extra step of creating a different independent market surveillance corporation called the Capital Markets Integrity Corp., which directly reports to the SEC, just to further strengthen the independence of the regulatory oversight over trading participants. We have received positive validation from local and global market players on these governance reforms we have undertaken and we continue to engage stakeholders to help us further this cause. We take pride as well that these reforms were the bases for having the country’s only stock exchange to be recently recognized as the best stock exchange in Southeast Asia.

We thus take exception to any insinuation, on the basis of mere speculation, that the PSE is not capable of managing responsibly any information that some of its employees may acquire in the course of their surveillance work and activities.

These types of reforms that were are undertaking are what we believe will contribute to the growth of the market and benefit all types of investors. We pursue these reforms to in fact help our market get out of the “dark ages” where infrastructure and regulations are subjected to legacy constraints and resistance to change even when many of these changes have proven to have positive effects in other markets.

We hope we have clarified the issues raised in the column and we  hope that our views can be included in the succeeding issues of your newspaper.

Thank you very much.

Very truly yours,

ROEL A. REFRAN

Chief Operating Officer