Q1: Compared with the main board, what are the changes in the trading mechanism of the SSE STAR Market, and what risks should investors pay special attention to?
A: Based on learning from the experience of overseas developed markets, the Shanghai Stock Exchange (SSE) has introduced a series of innovative mechanism for trading on the SSE STAR Market in comparison with that for the main board, which require the investors to pay attention to the changes in the following four aspects.
First of all, the price limit is liberalized / relaxed. No price limit is set for the stocks on the SSE STAR Market in the first 5 trading days after the listing, which is different from the main board, and after the period, the daily price limit is relaxed from the 10% for the main board to 20%. The main purpose of relaxing the price limit is to achieve adequate game in the market, form equilibrium prices as soon as possible, and improve pricing efficiency. It should be noted that in the initial stage of the trading of the newly listed stocks, the intraday trading volatility may be significantly higher than that on the main board. It is suggested that individual investors should participate cautiously and avoid following suit blindly.
Secondly, the order price limit is introduced. The “order price limit” introduced on the SSE STAR Market means that during the consecutive auction, the buy order price of the limit orders shall not exceed 102% of the benchmark bid price; the sell order price shall be no lower than 98% of the benchmark ask price. For example, if the current best buy order price of a stock is RMB10, the sell order price shall be no lower than RMB9.8; if the current best sell order price is RMB10, the buy order price shall not exceed RMB10.2. It should be noted that for the reasons such as the rapid price changes and the quotation delay, the orders placed by some investors may be invalid because of exceeding the above-mentioned order price limit. It is suggested that the investors wishing to get the orders filled as soon as possible should use the best market order on their own side or on the counterparty’s side.
Thirdly, the intraday temporary trading suspension mechanism is optimized. According to the characteristics of the companies listed on the SSE STAR Market, the SSE has optimized the existing temporary trading suspension mechanism of the A shares in the following two aspects. First of all, the thresholds for triggering the temporary trading suspension are relaxed, and are raised by 10% and 20% to 30% and 60% respectively, so as to avoid the situation where the trading suspension is frequently triggered on the first day of the listing. Secondly, the lengths of both the two trading suspensions are shortened to 10 minutes. It should be noted that during the temporary trading suspension, the investors can continue to place or cancel orders, but the quotation will not be displayed in real time. When the trading suspension is over, the SSE will conduct the centralized matching for the existing orders.
Fourthly, the protective price limit is set for the market orders. When placing a market order, the investor must enter a protective price limit at the same time, otherwise the order will be invalid. The price limit protection set for market orders is mainly out of the following two considerations: first of all, in the case of poor market liquidity, it can prevent significant price fluctuations caused by market orders, and can also provide a protection instrument for the investors to control the cost of placing orders; and then, it helps the securities companies to conduct the front-end control of funds for the market orders without any price limit.
In addition, the after-hours fixed-price trading is introduced on the SSE STAR Market, two types of market orders are newly added, the securities lending mechanism is optimized, and the minimum quantity of an order is increased.
Q2: What risks should the investors pay special attention to when investing in the companies listed on the SSE STAR Market?
A: The companies listed on the SSE STAR Market are usually characterized by significant uncertainty in performance and remarkable difficulty in valuation. Therefore, in the initial stage of the listing, the new stocks tend to see the prices fluctuate sharply in the secondary market. From the perspective of overseas markets, there are also large fluctuations in the initial stage of the trading of the new stocks. In the first half of 2019, the stocks newly listed on the Nasdaq recorded a maximum daily increase of 316.5% and a maximum daily drop of 52.0% in the first 20 days of listing. On the main board in Hong Kong, the largest daily increase was 218.6%, and the largest daily decline was 48.0% in the first 20 days of listing. In terms of the individual stocks, for example, the NIO was listed on the Nasdaq in September last year with the issue price at US$6.26. The stock price once rose to US$13.80 in the first three trading days, an increase of 120.44%, and then began to plunge, falling below the issue price within 10 trading days. Another example is the Luckin Coffee, which was listed on the Nasdaq in May this year, dropping all the way below the issue price on the fifth trading day after experiencing a 52% surge on the first trading day.
As the companies listed on the SSE STAR Market are different from the traditional enterprises in technological content and corporate development model, the investors should also break away from the previously adopted “theory of only measurement by price-earnings ratio” when judging the investment value of a company on the SSE STAR Market. Instead, the investors should conduct rational investment and advanced investment by finding the most suitable indicators for value judgment based on the different models of the companies, making multi-dimensional examinations and conducting multi-angle demonstrations. At the same time, we also call on market institutions to abandon the trading mode of “cutting leeks” which will hurt the retail investors’ profits. We should make rational investments and shrewd decisions with judgments based on a company’s fundamentals. With further consensus and concerted efforts, we should jointly protect the SSE STAR Market, implement the national strategy, and safeguard the reform achievements.