While Thailand’s equity market has been one of the best performing Asian markets this year, there is little incentive for investors to boost exposure, as limits for foreign traders continue to frustrate international firms.
Having hit a 19-year high on May 21 at 1,643, the Stock Exchange of Thailand (SET) index has since pulled back, but is still up 3% year-to-date, closing at 1,403.27 on June 13, with some 85.4 billion baht traded ($2.76 billion) that day alone.
While market sentiment is upbeat – with SET officials expecting a record number of initial public offerings this year and anticipating newly listed companies will exceed market capitalisation of Bt120 billion – international investors are still concerned over the infrastructure in place.
Thai equity volumes have surpassed those of Singapore and Malaysia combined, yet there has been little effort by regulators to improve tick sizes, execution latency or propose new infrastructure to encourage more international participation, says David Rabinowitz, head of direct execution services Asia at UBS. This is a worry for institutional investors, he notes.
Thai stocks are seeing the widest spreads across Asia, second only to Indonesia, with some names trading as wide as 65 basis points. Although volume and liquidity has been very strong, it’s the retail participation (67%) and other macroeconomic factors driving liquidity in the Thai market, Rabinowitz says.
Yet foreign investors are subject to limits on ownership of Thai stocks, which can be anywhere from 25-49%, depending on the sector. When they buy Thai equities, they can only buy what are termed 'foreign shares', which often trade at different prices from the local tranche due to different trading dynamics. They must also check with their brokers whether the limit on holding such stocks has been reached.
To circumvent this issue, in 2000 the Thai bourse created a subsidiary to issue non-voting depository receipts (NVDRs), which enable foreign investors to own Thai shares, with the same financial benefits such as dividends and rights issues, barring the right to vote.
However, buy-side traders in the Thai market find the NVDR – and the foreign-versus-local split of the stock market – process to be unnecessarily complicated and long-winded.
"There is a lot of latency involved when you have to convert your order into NVDRs; or finding out from the broker whether the foreign limit on a particular stock has been reached, " says a senior buy-side trader in Singapore.
Many asset managers trading stocks in Thailand have been checking foreign limits and conversions manually. Aside from the massive delays, the risk of miscalculation is significant – meaning a trader might think there is enough room for conversion into foreign stocks, only to find the limit has been reached.
“You would be stuck with the local tranche and have the problem of settling the stock into a foreign tranche,” another industry source explains.
As a result of the abovementioned issues, foreign investors often see little point owning Thai stocks.
Only brokers have access to information about foreign holdings of local stocks relative to their limits. Even if investors see high trading volumes on 'foreign stocks' on a third-party data terminal, they cannot quickly gain exposure without checking first with the broker. To avoid such delays, foreign investors often just buy NVDRs.
As international investors are put off by high transaction costs and confusing dynamics between local and foreign shares, there has been an uptick in overseas brokers setting up algorithms to help clients circumvent operational issues.
For example, Morgan Stanley offers a smart order routing algorithm (SOR) that automatically scans both the local and foreign tranches of that stock and determines what the daily limits are. This eliminates manual checks and miscalculation risk, notes Shamu Thambi, executive director at Morgan Stanley’s electronic trading unit.
“Access via the SOR reduces operational overhead and the risk of settlement issues while automating the conversion process and getting clients access to the right liquidity at the right price,” he tells AsianInvestor.