BSE fine-tunes tracking of shares performance
Brian Benza | Friday January 29, 2016 15:19
Effective Monday (February, 01), the BSE says it will discontinue the computation and reporting of a metric called “ Weighted Price”.
The weighted price, which is calculated by computing the volume weighted average price of stocks using the last five trades of a security on the BSE, was being factored in determining the main indices that measure shares’ performance.
In a statement, the BSE says the rationale for the decision to discontinue reporting of the metric is that liquidity for a number of counters on the bourse is very low.
“The low liquidity leads to reference being made to outdated data, leading to negative impact on the indices as they require the use of this parameter,” said the BSE.
The BSE tracks its performance using three main indices, which include the Domestic Company Index (DCI), the Foreign Company Index (FCI), incorporating companies, which are dual, listed on the BSE and another stock exchange.
The third index is the Local Asset Status Index (LASI) that measures the domestic companies and all foreign companies awarded the local asset status by the Ministry of Finance.
Analysts at African Alliance said although the changes have both pros and cons, the positives outweigh the negatives.
“On the positive side, the daily index prices should be more accurate and robust as the constituents are being priced with the latest closing price. Previously, the constituents would have been priced using the average weighted price of the last five trades. So for example, a highly illiquid stock that has risen from 50 thebe to 100 thebe over the last year, but only had five trades at 10 thebe increments, would be valued at (60+70+80+90+100) / 5 = 80 thebe today within the index. Whereas the new methodology would value the stock at 100 thebe in the index, which is clearly more reflective of reality,” said African Alliance analysts, Justin De Klerk and Chandapiwa Majola.
On the flipside, the analysts said - post the changes - there is a possibility of increased volatility particularly in small trades.
“An example where the new methodology would be less favourable, is in the case where a stock has been trading in a clear valuation range at good volumes (which give credibility to that valuation), say 100 thebe, but then a small trade goes through at 50 thebe just before the market close.
“In this case the stock would be down 50% today within the index calculation (but market participants will typically correct this quickly the following day, especially in the larger, well traded counters)
“So overall, the index moves are likely to be more volatile, but with overall more accuracy of market valuation,” De Klerk and Majola added.
As part of the improvements, the BSE says it will also change the determination of the “Closing price”, metric factored in calculation of the market indices.
Effective Monday, determination of the “closing price’ will now be based on the closing auction, failing which the closing price will be determined using the volume weighted average price of trades executed during the trading day. If there is no history of past trades, the reference price of the security at the point of listing will be defined as the closing price.
The BSE is also improving the presentation of the Daily Market Report (DMR), which will now be available in Microsoft Excel spreadsheet format instead of just PDF.