As TASE Trading Volume Drops, the Stock Exchange to Revamp the Indexes

TA-25 to become TA-35; TA-100 expanded to TA-125 as benchmarks will widen in bid to up trading volumes.

Bloomberg

The thin trading volumes in recent years on the Tel Aviv Stock Exchange have now led the TASE management to take a number of steps to halt the slide, among them a proposal to increase the number of companies featured in the benchmark stock index currently known as the Tel Aviv-25, but soon to become the Tel Aviv-35 index. The broader Tel Aviv-100 index is also slated to expand – to include the 125 largest companies traded on the exchange.

In other tweaking, the Tel Aviv-75 would become the Tel Aviv-90. The Communications Index, of which the Bezeq telecommunications company represented 70% of its value, would be expanded to eight companies, each of which will not be able to exceed 20% of the index value. The changes, which include other adjustments, all of which still require final approval by the TASE board, are slated to be implemented gradually over a 12-month period.

About 95% of the cash invested on the TASE is put in companies features in its high-profile indexes – the Tel Aviv-25, TA-75, TA-100 and the Banks-5 index, according to stock exchange data. That is one of the reasons for the decision to revamp the indexes.

These plans are to be complemented by other efforts to increase trading in mid-level stocks. [See news brief on this page]. The exchange’s management also wishes to reduce the risk of investors with money in the group of long-standing indexes by imposing low ceilings on the maximum weight of any individual stock (4% on the Tel Aviv-25 index, for example, as opposed to the current 10% maximum).

The minimum threshold requirements for inclusion of a company in any of the stock market indexes are also slated to be made stricter. When it comes to the Tel Aviv-25, the minimum proportion of shares held by members of the public will be raised to 35%, while companies featured on the Tel-Aviv-35 will require that at least 1.5 billion shekels ($394 million) of the company’s stock be held by the public.

Although the plan has been discussed by the board of the exchange, TASE officials will be holding talks with key figures in the capital market sector in the near future to finalize the changes. If and when the changes are approved, the transition will only take place next year and will be phased in on a monthly basis over the course of a year so as not to disrupt the markets.

10 leading stocks to lose influence

One of the immediate effects of the change that the TASE management is seeking to implement is curbing dependence upon a handful of stocks in the benchmark index. Last year, for example, the Tel Aviv-25 index rose by 10%, but about 6 percentage points of that increase was contributed by Teva Pharmaceutical Industries.

TASE officials are seeking to decrease the influence of that limited group of stocks. Currently, the top 10 companies on the Tel Aviv-25 index accounts for 70% of its value – but with a new ceiling limiting the weight of any individual stock in the index to 4%, the value of the top 10 will be cut to 40%.

The most dramatic change will be to the TA-Composite Index, a broad index of all of the shares in what is called the Index Universe. It does not include all the companies traded on the TASE, however, because they must meet minimum requirements for inclusion. The 10 largest stocks on the Composite Index currently account for 55% of the total weight of the index, but the 10 companies’ influence is slated to drop collectively to 5%, as the plan calls for the weight of any individual stock to be limited to 0.5%.

The planned reform is designed to make the TASE indexes more stable and substantially reduce the risk posed by financial investments linked to the indexes, which directly involves assets of about 37.5 billion shekels. Stock exchange officials have expressed the belief that the revision of the indexes will provide a transparent response to a range of eventualities by simplifying the rules governing updates to the indexes, in the process making them more useful to the investor. Revisions that are currently made weekly are slated to be made once a month, for example.

TASE officials are also eager to make the exchange more attractive to additional companies that might consider a listing. They plan a streamlined process for listing of new shares throughout the year (in contrast to the current eight months during which it is available), and for the shares of long-standing companies on the exchange.

New indexes

In addition to the proposed changes to existing indexes, the TASE plans on launching new indexes in which each stock will be equally weighted. They are to include a TA Blue Chip-12 index featuring the top 12 stocks on the new Tel Aviv-35. Inclusion on the Blue Chip-12, according to the proposal, is to be limited to companies incorporated in Israel and will not include companies from the category known as “investment and holding.” No more than two firms from any industry subcategory will be included in the Blue Chip-12.

The proposal also calls for a new Tel Aviv-150 index, to include mid-level companies – an index that stock exchange officials hope will become a mainstay of the TASE. Efforts will also be made to eliminate certain overlap among the indexes.