2018.9.10
Tiffany Hsiao
The trading system of the stock market in Taiwan has gone through various changes. Although the matching interval of the current call auction has been continuously reduced from 20 seconds to the current 5 seconds, still the continuous trading system which has become a trend among many countries is not yet adopted. Jun-ji Shih, former Chairman of the Taiwan Stock Exchange Corporation (TWSE), pointed out when interviewed in December 2016 that call auction is old-fashioned and outmoded. Although continuous trading is ready, still the actual operation requires significant cooperation from securities firms and can be launched at any time as long as securities firms are ready.
Although rumor had it that a continuous trading system was to be implemented, still its implementation was nowhere in sight. As of the end of this May, TWSE made a major move to announce that the planning for the continuous trading system had been completed and submitted to the Financial Supervisory Commission (FSC) for approval. Finally, a blueprint of the system was finally revealed.
I. Introduction of the trading system
Since the stock market in Taiwan was established on February 9, 1962, the trading system has gone through several adjustments. When the TWSE was just established, stock transactions were made via blackboards with the assistance of oral quotations, and prices were quoted orally by representatives of securities firms in a centralized trading market. Meanwhile, hand gestures indicating buying or selling were also used to help with the transactions, and when both parties agreed on prices, a closing gesture would be made. In July 1973, ordering at dedicated counters was adopted, instead, where representatives of securities firms prepared trade orders for submission to TWSE’s dedicated counters for trading, and the personnel in charge of execution behind the counters would conduct matching through continuous trading.
Later by the end of 1991, all securities were included in trading via computer-assisted systems and call auction was conducted upon market opening, while continuous auction (i.e., call auction limited to two ticks) was conducted following market opening. Since August 1993, all securities trading to date at the TWSE has been conducted by a computerized automatic system. To ensure the fairness, impartiality and openness of trading, all kinds of trading information after matching is conducted each day is transmitted to the business locations of various securities firms for decision-making reference of the investors through a market information disclosure system and a videotext system.
Since the stock market showcases the economic performance of a country and is also a funding channel for industries and businesses, the stock market has also been adjusted in recent years in reference to the trading systems in other countries so that the international competitiveness of the stock market in Taiwan can be enhanced, the operating efficiency for stock trading can be improved, and the trading environment of the stock market can better meet market needs. The trading systems in major foreign markets consist primarily of two types: continuous trading and call auction. In all major stock markets in, for example, New York, London, Germany, Hong Kong, Tokyo, Singapore, Shanghai, etc., the intraday trading model adopts matching through continuous trading to address the timeliness of trading and collect a larger number of trade orders to decide more objective opening and closing prices. Therefore, the method of intraday continuous matching has clearly become a mainstream development trend in global stock markets. Even for the Malaysia Stock Exchange, which had followed in the footsteps of the Taiwan market by adopting a call auction trading model, changed the trading model from call auction to continuous trading in December 2008.
(1) Current practice: call auction
Currently, the stock market in Taiwan adopts a call auction trading model. Simply put, call auction means that trade orders for a period of time are first collected before matching is conducted based on the prices. For the same prices, closing is determined based on time (trade orders input before market opening are still ranked by computer generated random numbers) under the principle that the closed prices should satisfy the highest turnover. Therefore, there is only one trading price/volume for such tray. After matching is completed, not only the closed price and volume but also the five highest unexecuted buying prices in orders and the five lowest unexecuted selling prices in orders are disclosed. Therefore, the information about the best five buy-and-sell prices/volumes investors see is information about unexecuted trade orders after intraday matching. However, other trade orders will be continuously entered after the intraday matching but before the matching on the next tray in order to participate in the call auction on the next tray. However, before matching for the next tray is conducted, the status of order prices and quantities is not disclosed. Therefore, as far as investors are concerned, the information about five unexecuted prices/volumes disclosed under call auction is not as timely as continuous trading.
(2) Future practice: continuous trading
Continuous trading is a trading model by which matching is conducted whenever trade orders are placed. When a securities firm enters a purchase order, a transaction is closed based on the ranking (from low to high) of sale order prices which have been entered but not yet executed in the order book. Conversely, if a securities firm enters a sale order, a transaction is closed based on the ranking (from high to low) of the prices in purchase orders which have been entered but not yet executed in the order book. When an investor issues a trade order, it can be closed immediately with counterparties offering different prices, resulting in at least one different closed price and volume. Therefore, the characteristic of continuous trading is that the transaction is faster than call auction with relatively more continuous prices. After entering a trade order, an investor does not need to wait for a period of time before knowing if the order is closed. Therefore, the trading efficiency is better than the current call auction mentioned above. In addition, continuous trading immediately discloses the closed price and volume and the best five prices and volumes in unexecuted purchase and sale orders. Since continuous trade orders are matched upon issuance and do not need to accumulate for a period of time, which causes problems such as information delay and lack of timeliness, the referential value of information about unexecuted prices and volumes as disclosed is relatively greater than information about prices and volumes in unexecuted trade orders for call auction.
The differences between the call auction and continuous trading systems include the methods for determining the closed prices, information transparency and types of available trade orders. Therefore, it is necessary to continuously review and implement all kinds of new trading systems in Taiwan in the hope that a fairer and more efficient, diverse and internationalized trading market can be established.
II. Schedule for implementing the continuous trading system
The FSC issued a newsletter on September 3 this year to announce that a continuous trading system would be formally launched in Taiwan. According to the newsletter, a continuous trading system will be implemented to enhance the trading efficiency and information transparency of the overall stock market and to fall into line with international practices. After the TWSE, the Taipei Exchange and the Taiwan Securities Association were invited for discussions about the overall plan and the consensus on promoting continuous trading in the stock market was obtained, the system is scheduled to be officially launched on March 23, 2020 so that securities firms and investors have sufficient time for preparation.
According to the newsletter, the highlights of the continuous trading system and its accommodating measures planned by the TWSE are separately described as follows:
1. Manners of implementation: continuous trading is implemented during intraday time slot (9:00-13:25) while call auction is still maintained around market opening and closing.
2. Types of trade orders: types such as “market price orders,” “immediate closing or cancellation,” and “closing or cancellation of all” are added to provide more choices for investors.
3. Sudden price stability measures: to prevent closing prices from exceeding investors’ expectation due to drastic market fluctuations, if the simulated closing price of an individual stock exceeds 3.5% of the weight average price five minutes earlier, the matching for each transaction will be delayed for two minutes and call auction will be conducted two minutes later before continuous matching resumes.
4. Quote disclosure information: “real-time trading information” and “five-second quote snapshots” (meaning the provision of a quote every five seconds) are provided.
5. Simulated platform: the TWSE will set up a simulated platform so that investors can use such platform to simulate ordering and monitoring of quote information and is planning to take incentive measures for securities firms and investors to attract investors to participate in simulated ordering and enhance the utilization rate of the simulated platform.
In addition, the FSC indicated that since the promotion of a continuous trading system in the stock market is a major market reform and involves a wider variety of aspects, the FSC has requested the TWSE and the Taipei Exchange to prudently handle system deployment and testing matters and has enhanced the promotion to practitioners of securities firms and investors in conjunction with the Taiwan Securities Association to facilitate the smooth implementation of the system.
III. Brief conclusions
Based on relevant experiences of other countries in adopting continuous trading, which gradually results in the development of a trading model of high frequency trading by securities firms, and with respect to the impact of such trading model on markets, although there have been major incidents such as flash crashes and erroneous trade orders, it appears inappropriate for Taiwan to balk at the continuous trading system or even decide not to adopt continuous trading simply to ultimately preclude issues such as high frequency trading. After the continuous trading system is implemented in a foreseeable future, it is possible that an increase of high frequency trading is unavoidable. However, continuous trading is not only a world trend but also is advantageous for truthful and rapid responses to market information. The implementation of the continuous trading system helps enhance the competitiveness and progression of the securities trading market. However, fairness is the primary concern of a securities trading market, as evidenced by the legislative objectives of the Securities and Exchange Act. The challenges from high frequency trading lie in whether it promotes market efficiency or disrupts market fairness. Therefore, when continuous trading is developing along with associated high frequency trading, we cannot overlook the importance of promoting market progress and conducting supervision with a proper angle, approach and scope.
At present when continuous trading is not yet adopted in Taiwan, although high frequency trading has not appeared while market participants still adopt a wait-and-see attitude and have much reservation, high frequency trading has been gradually waning in the US market recently due to an increasing number of operators in the market, which results in a decline of profitability. Despite the fact that the application circumstances of each system in various countries should not be overgeneralized, still it is necessary to heed the development status of other countries, take precautionary measures, learn necessary lessons and contemplate coping strategies when this system is developing in Taiwan. In addition, when the continuous trading system is being implemented, the protection of ordinary retail investors and small and medium-sized securities firms as well as institutional alignment cannot be overlooked, either. Ordinary investors can also pay attention to a simulated trading platform the FSC has committed to promote next year and familiarize themselves with the continuous trading system and make proper preparation through the operation of the simulated platform before the system is formally launched to deal with the emergence of the next trading model.