111 securities may be subject to CMA algorithmic trading controls

According to the latest liquidity classification file issued by the Saudi Exchange (Tadawul), the Main Market comprises 274 securities, of which 163 are classified as Category A, “very high liquidity,” representing approximately 59.5% of the market. The remaining 111 securities, or around 40.5%, fall into the other four categories that could be subject to the proposed restriction.

Tadawul classifies securities into five groups based on the Relative Time Weighted Average Spread (RTWAS) over the previous six months. The classifications are reviewed and published semiannually and take effect on the first trading day of January and July.

Tadawul sets the thresholds at an average RTWAS of 0.20% or less for Category A, 0.30% for Category B, 0.40% for Category C, 0.50% for Category D, and above 0.50% for Category E.

The classification does not depend solely on trading value or the number of transactions. Instead, it primarily measures the width of the spread between the best bid and best ask prices, taking into account the length of time for which the spread remains at a given level.

Put simply, the narrower the bid-ask spread and the longer it remains at low levels, the lower the RTWAS and the higher the security’s liquidity classification.

Securities in Categories B to E

Below are the securities falling into the four categories that could be subject to the proposed restriction, according to the current liquidity classification file issued by Tadawul.

Category B – High Liquidity:  63 Securities

Category C – Medium Liquidity:  30 Securities
 

Category D – Low Liquidity: 15 Securities
 

Category E – Very Low Liquidity:  3 Securities
 

Classification Already Used in Market Regulation
 

The division of securities into the five categories is not merely a statistical classification, as Tadawul already uses it to regulate certain market-making requirements.

The obligations relating to the percentage of time orders must remain in the market, minimum order size and maximum bid-ask spread vary according to the liquidity category to which a security belongs.  For example, Tadawul requires a market maker for Category A securities to maintain orders in the market for at least 80% of trading time, with a maximum spread of 0.65%, while requirements differ for the other categories.

Accordingly, using the same liquidity classification in the algorithmic trading draft represents an extension of an existing approach based on differences in securities’ capacity to absorb orders according to their liquidity levels.