How to Trade Shares or Stocks in Bursa Malaysia

This is Part 4 of my HOW TO START TRADING STOCK IN BURSA MALAYSIA series of articles.

If you missed my earlier posting, you can read them from the link below

Part 1 :
Part 2 :
Part 3 :

I mentioned Market Trade and Off Market Trade in Part 3. What are they?

No, they are not referring to your vegetable market!

Let us begin.

MARKET TRADE

Sometime Brokers or Dealer’s Representative (”DR”) refer to ‘Trade’ as ‘Deal’ such as ‘Market Deal’ or Off-Market Deal’.

When you give your order to Buy or Sell through Bursa order matching system (BFE), it is called Market Deal. This is because the matching of the order at particular price and quantity is not predetermined by Buyer or Seller. It is based on market demand and supply.

When there are more Buyer than Seller of a particular stock, the stock price will normally goes up. That means investors are more willing to Buy at higher price. Since investors wanted to confirm the Purchase of the stock, he will tell their DR to input his Buy order at a higher price than the rest of the of the investors’ prices as shown in the BFE. When more and more investors gave the same instructions for higher prices, naturally the stock price will goes up.

The reverse is also true. When more investors wanted to Sell a particular stock, the stock price will goes down. Investors desperate to dispose of their stock will instruct their DR to input a price lower then what other investors wanted to sell as shown in the BFE which again naturally drives down the stock’s price.

So again, Market Trade is consider as a NORMAL Trade and it is done through Bursa BFE’s auto matching system based on market demand and supply.

OFF MARKET TRADE

Off-Market Trade or Deal are the Buying or Selling of stocks based on a predetermined price by the Buyer and Seller. Generally the Buyer and Seller would have met and decided on a ‘Willing Buyer, Willing Seller’ concept to a particular price for a particular quantity of stocks. There are many reasons for such deals. Some of the common reasons are:

(a) Seller wanted to dispose of a big block of stock fast. If the Sales is done through the Normal Bursa matching system, the stock’s price can go down drastically (as I have mentioned above about more Seller than Buyer) thus not allowing the Seller to dispose of his big block of shares at the price the Seller wanted.

(b) Buyer wanted to buy a big block of shares at a price better than the current market price. If the Buyer go through the normal matching system, the stock price will be driven up to above the price that the Buyer wanted even before the Buyer can fulfill all the quantity that he wanted (again the concept more Buyer than Seller).

(c) Change of major ownership or shareholders. Sometimes a new owner wanted to directly buy from one of the major shareholders all the shares owned by the previous owner of the company. For example; a public listed Company A’s major shareholder owned 20% of the listed company and he received a very good offer from Mr Y. Mr Y wanted to own a public listed company and buying directly from the major shareholders will be fastest way for Mr Y to control a public listed company.

Off-Market Deal is also known as ‘Direct Business Trade’ (”DBT“).

In the stockbroking industry, there are 2 types of DBT known as ‘Married Deal’ and ‘Direct Deal’.

There is a difference between Married Deal and Direct Deal.

No, it has nothing to do with the marriage between a man and a women!

A Married Deal referred to the Purchase and Sales that is done between clients of the SAME Broker whereas Direct Deal is between clients of different Brokers.

TIPS : You will be surprise that many DR don’t know the difference between Married and Direct Deal.

There are certain rules for Off-Market deals.

You cannot do Off-Market Deal at any price you like. Before I proceed, I have to introduce to you a new term called ‘VWAP’ (Volume Weighted Average Price). The VWAP is automatically calculated by Bursa in the BFE and displayed in the DR computer screen (ie. BFE). Maybe there are some of you that are curious on how Bursa calculate the VWAP. For those that are not interested, you can skip this section below.

HOW TO CALCULATE VWAP?

Assuming there are only 3 matched transactions for the day (for easy calculation) for Stock A:
1. 20,000 units at RM2.00
2. 10,000 units at RM2.10
3. 20,000 units at RM1.95

The VWAP for ABC share is
= (20,000 x 2.00) + (10,000 x 2.10) + (20,000 x 1.95)
———————————————————-
20,000 + 10,000 + 20,000

= 100,000 / 50,000

= RM2.00

The process of doing Off-Market Deal are different from Market Deal. When you know the procedures, you will not feel frustrated with the delay or the documentations requested by your DR if you do any Off-Market Deal.

The Steps are:

(1) Buyer and Seller agreed on the price, the quantity and the date to transact the deal.
(2) Buyer and Seller contact their respective DRs. If its for Married Deal, then it only involved the same Broker which will make the whole process much simple and faster. Direct Deal will be more complicated as it involved 2 Brokers. For your information Married Deal can be transacted between clients of same DR or different DRs in the same Broker.
(3) The DR will submit an Off-Market Deal Request Form to the management normally Credit Control department for processing.
(4) All Off-Market Deal will need the Broker’s management approval which is normally by the Head of Dealing or Head of Operations in Investment Brokers or Executive Director of Dealing or Operations in other Brokers.
(5) Once approved the Off-Market Deal Request Form will be forwarded to a company paid DR to input into the Bursa’s BFE system. This step is only for reporting purpose to inform the public and Bursa that there are Off-Market Deals for the day for the particular stock. If its a Direct Deal then both Brokers will have to input into the BFE respectively to match the DBT.

Before a Broker will approve a particular Off-Market Deal, the deal has to meet a specific criteria which is a requirement under Bursa’s Rules:

(i) When an Off-Market Deal’s price is within +10% or -10% of the Previous day VWAP (”PVWAP”), the Broker can proceed to input into the BFE. Approval is without any problem. When a stock is listed for the first day, there is no PVWAP. Since there is no PVWAP, newly listed stock can’t have Off-Market Deal on the first day of listing.

Note: It is under proposal to allow Off-Market Deal for newly listed stock on the first day of listing but the guidelines hasn’t been finalised.

(ii) When the price is between +/- 10% to +/- 15% of the PVWAP, the Broker can still approve (normally they will), but the Broker will have to report such a deal in writing to Bursa after it has been done. The Broker will also have to provide a copy of contract note and a copy of payment/settlement of the contract to Bursa. Clients are normally not aware of such requirement.

In situation (i), no details of the clients is forwarded to Bursa when DR input the Off-Market Deal into BFE. But in situation (ii), Bursa will know who is the buyer and seller and how the payment for the purchase is made.

TIPS : Actually Bursa knows who Buy and who Sell because Bursa has access to the BFE system of the Brokers. Bursa can remotely access the BFE server to check the Buyer and Seller Trading Account Numbers and Names. This information is not known to many people.

(iii) If the Buyer and Seller want to Buy or Sell at the price that is above +/- 15% of the PVWAP, the Broker has to write to Bursa for approval before they are input into the BFE. It might take between 2 to 7 market days before getting a reply from Bursa whether the deal is approved. Broker has to provide more documents and the Buyer and Seller will have to sign certain forms. You will need to find out what are the required documents from the Brokers because sometime Bursa will request different documents based on the particular transaction.

Example of 10% and 15% of the PVWAP calculation:

If the PVWAP is RM2.00;

1) +10% = RM2.00 + (10% x 2.00) = RM2.20
-10% = 2.00 - (10% x 2.00) = RM1.80

2) +15% = 2.00 + (15% x 2.00) = 2.30
- 15% = 2.00 - (15% x 2.00) = 1.70

Part 3 and Part 4 of HOW TO START TRADING STOCK IN BURSA MALAYSIA are more than basic information so it tend to get more technical. Is your head getting dizzy?

I will end Part 4 on BURSA MALAYSIA MARKET AND OFF-MARKET TRADES.

Do you think you can still take in more information? Wait for my next posting. It will be next year.

HAPPY NEW YEAR 2008!

As I wrote in my earlier article about Share Margin Financing, there are two type of share margin financing in Malaysia; margin financing by stockbrokers and margin financing by banks.

PRO TRADE SHARES will try to explain the technical aspect of share margin financing provided by stockbrokers in Malaysia. Stockbrokers, whether they are boutique brokers, Universal Brokers or Investment Banks, have to follow Rule 703 of the Rules for Stockbrokers as issued by Bursa Malaysia.

The rules prohibit stockbrokers to provide share margin financing to ’staff’ and its immediate family members. Staff include dealers, remisiers and directors of the brokers.

Note: Brokers here includes boutique stockbroking companies, Universal Brokers and Investment Banks.

Bursa allows the margin accounts to be used for trading, subscription of IPOs (pre-listing shares), subscriptions to rights issue and redemptions from other brokers and other financing companies as approved by Bursa. The finance companies refer to licensed banks in Malaysia.

Note : Redemption means the takeover of the loan outstanding from the financier under the same beneficial name.

However one cannot use the margin account to redeem or cross-over the outstanding contracts from a trading account of the same beneficial owner within the same broker.

For example:

If a person A has outstanding purchases in a trading account with stockbroker P and this person A then opened a share margin financing account with the same broker P. Under Bursa rule, person A cannot cross over or execute a married deal (DBT) from his trading account to the margin account of broker P as both the accounts have the same beneficial owner.

However if person A has a share margin account with loan outstanding with other broker Q and person A wanted to ‘Redeem’ the outstanding position from broker Q using his SMF account with Broker P, then person A is allowed to use his margin account in broker P to transfer over the loan outstanding. The mode of transfer will be explain further in later part of this post.

Bursa rules also stated that broker must ensure client share margin of financing ratio to be at or above 150% at all time. When a client Share Margin Financing (also referred as SMF) ratio falls below 150%, the broker is to do a margin call on the facility. Client is given 3 trading days to rectify his SMF ratio, failing which the broker must take step to sell the shares collateral in the account.

Client can either top up his SMF with cash or additional ‘acceptable’ shares collateral to bring the SMF ratio above 150%.

Note: I quote the word ‘acceptable’ because sometime certain brokers might not accept certain stock counter due to certain reasons. Some of the reasons are the brokers has too many of the particular stocks or internal policies prohibit giving value to particular stocks as the listed company could be a major shareholders of the broker or the particular stock is listed under PN4 or PN17 or it could also be due to the broker’s policy not to give value to derivatives (such as warrants).

Bursa Malaysia Rules 703 also states that when a client SMF ratio falls below 130%, the broker must institute selling-out on the same day unless client can rectify the position immediately. If you have a share margin account, you must remember that brokers have to report daily all their SMF accounts position. Therefore brokers cannot differ rectification of SMF accounts with ratio below 130% to another day as they will have to report to Bursa why no action is taken in their following day report. Unless the reason is reasonable, Bursa can impose a fine on the particular broker. Normally the only reasonable reason acceptable is because the SMF only has one type of stock and that particular stock has no buyer for the day. This can happen if the particular stock goes limit down.

Note: Limit down means a particular stock price goes down by 30% of the last done price. For example, stock A’s previous day last done price was RM1.00 and when the stock open for trading today, there are no buyer but there are many seller trying to sell. Since there are many seller, all seller will try to sell at the lowest price in order to get their sales order done. Bursa Malaysia only allow the maximum lowest price per trading session as 30% from the previous last done price. So the seller price will be listed as 70sen. However since there are no buyer, there will not be any selling done.

In the above situation, the broker will not be able to rectify client’s SMF position to bring the ratio to above 130% on the same day.

The method or equation to SMF ratio is:

SMF ratio = {Total Equities/Total Loans Outstanding}

Total equities = Discounted shares collateral value

Total loans outstanding = outstanding purchases contracts, interest charges, debit notes and rollover fees less cash deposit less credit notes less credit interest from the cash deposit (if any).

For example:

Case A

Cash deposit = RM100,000

Purchase 250,000 units of stocks A at RM1.00 = Outstanding purchase contract (ie. loan) = RM250,000

Shares collateral value = 250,000 units of stock A x RM1.00 (day end closing price) = RM250,000

Assuming that the broker give full value to the shares collateral (from the purchased contract) = RM250,000

SMF Ratio = collateral value / (outsanding purchase contract value - cash deposit)

==> SMF Ratio = RM250,000 / (RM250,000 - RM100,000) = 167%

Result = SMF Ratio is within the approved / allowed ratio.

Case B

Assuming all other criteria same as the above except that the broker only accept 80% of the collateral market value = 250,000 shares x RM1.00 x 80% = RM200,000.

==> SMF Ratio = RM200,000 / (RM250,000 - RM100,000) = 133%

Result = SMF Ratio is below 150%, therefore margin call is issued.

Client will have 3 market days to rectify his position.

Based on the above example, its easy to understand the calculation of SMF Ratio, isn’t it?

REDEMPTION

As explained above, a client with a new SMF can redeem from another financier. Here how it works;

1. We use the same example from above. Assuming you have a SMF account with Broker A. However, Broker A only give your collateral share value at 80% of the market price.

2. You manage to apply for a SMF with Broker B that is willing to give you 90% of the market value for you share collateral.

3. After your SMF account with Broker B is approved, you write in to instruct Broker B to redeem your SMF account with Broker A. You also need to write a letter to Broker A to tell them that you have instructed Broker B to redeem you SMF account.

4. Broker B will then write to Broker A to inform them of our instruction and request Broker A to provide your SMF account position (ie. the loan outstanding amount and the available shares collateral).

5. Once Broker B has confirmed that you shares collateral is sufficient to maintain your SMF ratio at the minimum 150%, Broker B will confirm the redemption instruction with Broker A. Broker B proceed to issue payment to Broker A and Broker A will transfer your shares collateral to Broker B. The new SMF loan amount with Broker B will be RM150,000.

6. Based on Broker B agreed 90% of the market value for the share collateral, you SMF ratio will be:-

==> SMF Ratio at Broker B = (250,000 shares x RM1.00 x 90%) / RM150,000 = 150%.

Result = Your new SMF Ratio is within the approved limit and no margin call.

Note : It is therefore better for you to scout around for Brokers or Banks that give you better value for your shares collateral.

I hope PRO TRADE SHARES has given you some beneficial informations about Share Margin Financing facility with stockbrokers to enable you to better manage your trading portfolio.