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It has been said so many times that it has become accepted wisdom - the penny stock crash a year ago and the "inept'' handling of that affair by regulators has hurt retail confidence so badly that many have decided not to trade anymore. On the face of it, this sounds plausible because if three stocks can collapse by 90 per cent in a day, then so could others - and who would want to trade in a market where such losses are possible? On closer examination however, these claims simply don't make sense.
The crash came after SGX designed three stocks, signalling that possible a false and disorderly market was in force. It was only afterwards that claims of a loss of confidence were heard, so logically, a move by SGX to impose order and transparency appears to lie behind the loss of confidence. This to me is absurd because it means that SGX's attempt at ensuring a fair market and protecting investors has led to investors abandoning the market. If I'm right - and I think I am - then what does it say about the market here?
Granted, the exchange only moved after the stocks had appreciated maybe 50 times in a year or so, which means it could be criticised for allowing a massive bubble to inflate under its nose without earlier intervention. But if it had stepped in earlier, it risked being accused of unwanted interference. It was one of those "between a rock and hard place'' situations - move early and get whacked for interfering; wait until the bubble is very big and get whacked for acting too late.
This is not to say the episode was well handled - it was not. The designation I feel was lifted too early, communication was poor throughout and the rules regarding contra were not properly followed, resulting in chaos at broking firm premises. But again, why should that have contributed to any terminal loss of confidence? It might temporarily rattle the market yes, but would it really keep investors away for good?
As I said in a recent Hock Lock Siew column, there is plenty of hypocrisy at play when it comes to the market. If stocks are being manipulated, very few people are prepared to complain and the game is to get in and out quickly before the syndicates pull the plug - or before the exchange puts a stop to the rigging. If there is regulatory action however, you can bet there will be plenty of finger-pointing and blame apportioning.
As an interesting but relevant aside, I once received an anonymous letter asking me not to write about the need to clamp down on rigging because it is only through playing with manipulated stocks that the retail investor has a hope of surviving in a market dominated by big money.
Incredible though it may seem, I think this thinking is what lies behind this whole "loss of confidence'' claim that we've been hearing about. Because the rules are being tightened to strengthen the market and because manipulators have likely abandoned local stocks for other, more promising markets, the bulk of retail players have decided to throw in the towel. It is nothing to do with having a weak, strong, inept or capable regulator, it is all about whether highly speculative activities can continue as they have in the past.