Trading Volume & The Exchange Company

Bursa Malaysia Berhad (MYX1818) is an exchange holding company approved under Section 15 of the Capital Markets and Services Act 2007. It operates a fully integrated exchange, offering the complete range of exchange-related services including trading, clearing, settlement and depository services. Significant portion of revenue of an exchange company is determined by the level of trading activity in both security and derivative markets. Other portions of its revenue include listing fees, others.

In the following chart, I will attempt to demonstrate the relationship between trading volume of FBMKLCI and share price of Bursa Malaysia Berhad. It is possible that the trading volume may serve as leading indicator for the share price of Bursa Malaysia Berhad, as the quarterly earnings of this exchange company will depend on the historical trading volume in the past quarter (prior to the announcement of its quarterly earnings announcement). In a nutshell, if trading volume goes up, this company is envisaged to do well in the coming quarter.

Instead of using the raw trading volume data of FBMKLCI, I have done a simple smoothing process whereby we have compared the 30-day moving median of trading volume against its historical median of trading volume since Jan 2010. There are possible pockets of divergence as the revenue composition of Bursa Malaysia does not solely depend on the level of trading activity (e.g listing fees, etc). Further, the trading volume of FBMKLCI represents the trading volume of the 30-largest market cap listed companies on Bursa Malaysia (i.e excluding mid-small caps). Nevertheless, as shown below, the recent divergence between the share price of Bursa Malaysia and trading volume appears to be relatively significant.

bursa malaysia 1.png

Let me try to quantify the extent of divergence by performing a simple regression analysis -share price of Bursa Malaysia Berhad vs 30D-moving median of trading volume of KLCI:

bursa malaysia 2.png

Based on this simple analysis, it appears that the current share price of $9.96 is relatively higher than predicted share price of $9.47 but it is still within the 95%-confidence band of $8.15-$10.79.

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