Stocks 'Trapped in the Bathroom and Unsellable' – Will Taiwan’s Disposition System Be Reformed? FSC Responds

Recently, Taiwan's stock market has been in a continuous downturn. Although the overall index decline is not severe, many individual stocks have already halved in value. Market participants are blaming the 'attention and disposition system' for worsening liquidity during this falling market, making it harder to absorb the wave of selling pressure known as 'many killing many' (duo sha duo).

In response, the Financial Supervisory Commission (FSC) stated that the Taiwan Stock Exchange and GreTai Securities Market (GTSM) are currently reviewing the relevant system and will provide an official explanation once the assessment is complete.

A few months ago, Taiwan's stock market experienced a sharp rally. Even MediaTek, the second-largest weighted stock, was temporarily suspended due to excessive short-term gains, sparking investor calls for a review of the disposition system.

The FSC's previous report explained that the purpose of designating 'attention' and 'disposition' stocks is to alert investors to trading risks and to maintain market order and settlement safety. Most Asian markets have similar mechanisms, so the system remains necessary for now. However, the FSC acknowledged that Taiwan's capital market has grown significantly in recent years, with increased trading activity and higher stock price levels, making it necessary to periodically review and adjust the criteria for attention and disposition designations.

Under the current system, individual stocks may be labeled as 'attention stocks' if their price, trading volume, or turnover rate shows abnormal behavior—such as excessive short-term price swings, or price-to-earnings (P/E) or price-to-book (P/B) ratios that deviate significantly from industry norms. If the situation worsens or a stock is repeatedly flagged as an attention stock within a short period, the exchange may further designate it as a 'disposition stock'.

Market professionals point out that because the trading mechanism changes for disposition stocks, many investors avoid them altogether. With liquidity suddenly dropping and buy orders drying up, even investors who want to cut losses or are facing margin calls ('duan tou') may find it difficult to execute sell orders, creating a vicious cycle.

Huang Hou-Ming, Deputy Director of the FSC's Securities and Futures Bureau, explained during a regular press briefing on the 30th that the 'Guidelines for Announcing or Notifying Attention Trading Information and Disposition Procedures' were established by the exchanges to maintain market order and alert investors to risks. He noted that similar regulatory measures exist in other countries and that the FSC is currently reviewing whether adjustments are needed to the attention/disposition criteria and the T+2 settlement cycle. Once the evaluation is complete, a formal public announcement will be made to better align the system with market structure and investor needs.

Additionally, amid the recent market decline, there is growing concern about whether margin maintenance ratios are approaching the critical threshold that could trigger a wave of forced liquidations. However, discrepancies between data from private investment platforms and official statistics from the Taiwan Stock Exchange have prompted the exchange to clarify its calculation methods and practical procedures, urging investors to make rational judgments.

Coincidentally, several private platforms have recently stopped providing related data, and historical data is being taken offline. This has led to speculation that regulators may be 'checking the meters' (a metaphor for regulatory scrutiny).

Huang clarified that the current margin maintenance ratio is calculated on an 'entire account' basis for each investor, not independently based on the price movement of a single stock. As of July 29, the overall 'entire account' margin maintenance ratio for Taiwan's stock market stood at 161.63%, well above the 130% margin call threshold.

When asked whether the authorities could disclose the exact number and proportion of accounts with low or near-marginal maintenance ratios, Huang stated that the current reporting mechanism requires brokers to consolidate client data before submitting it to the exchange. Requiring detailed disclosures would pose significant challenges in terms of data transmission volume and investor privacy protection. The FSC will continue to work with the exchange to evaluate the technical and legal feasibility of such disclosures.