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MAS-SGX measures: more can be done

Scope for improvement with regard to manipulation and disciplinary action
Monday, February 10, 2014 - 06:00

THE moves proposed by the Monetary Authority of Singapore (MAS) and the Singapore Exchange (SGX) on Friday targeting speculative trading in penny stocks are welcome since all are aimed at improving the quality of listings, transparency and levelling the playing field for small investors.

Some were obvious and overdue - for example the need to regulate the announcement of broking firms' trading curbs was raised twice before in this column a year ago ("Broker-imposed trading curbs - how to manage?" Hock Lock Siew, Feb 7, 2013, "Broker-imposed trading curbs part 2 - SGX must regulate" Hock Lock Siew, March 19, 2013).

So it's encouraging that the authorities are now proposing that any announcement of trading curbs be made via SGX's website and not in the ad hoc, unregulated manner currently practised which gives broking firm insiders an unfair advantage.

There was also a need to enhance short-selling disclosure by setting a threshold based on percentage of issued shares ("Short selling disclosure proposals require tweaking" Hock Lock Siew, Dec 1, 2008), so the 0.5 per cent now proposed is prudent.

Similarly, the need to curb the speculative excesses generated by contra trading has been raised before in this column and in the BT Letters Page. Resistance to dismantling contra has come from the retail sector - both brokers and investors want it to stay - so the proposal to reduce settlement from t + 3 to t + 2 and to require 5 per cent collateral is a clever compromise since it should reduce but not totally wipe out contra trading. It should also help in the better management of credit risk.

But the proposal to impose a minimum share price of 10-20 cents thus forcing companies with sub-10 cents shares to consolidate their capital might require further study as its implications are not readily obvious. Some expert observers like Society of Remisiers president Jimmy Ho believe that if it is implemented then 10 cents should be the appropriate threshold. Others worry about the impact on liquidity.

All told, the measures are consistent with SGX's oft-stated preference for a disclosure-based, "buyer beware" regime in which its role is mainly to fine-tune the governance, trading and settlement frameworks and to act as a signaller of caution when it believes this is warranted.

As always though, there is scope for improvement, starting with the fact that although improved short reporting is welcome, so too should there be enhancements to long reporting, ie, those who have bought and are buying. After all, manipulators have to buy first before pulling the plug or going short.

SGX and MAS should therefore study past incidences of rigging and manipulation and devise ways to counter such activities. First, if a few brokers are responsible for a large proportion of a stock's daily trades - say 80 per cent - and consistently over a prolonged period - such as three months - a red flag should be raised and the market alerted.

Second, anecdotal input from market players is that those who indulge in cornering and manipulation sometimes route their orders via offshore proxies. These could appear as nominee accounts in annual reports or company disclosures. This information is useless to readers and the authorities should study ways of forcing accurate disclosure of the true beneficial owners of such shareholdings.

By the same token there should be daily disclosure of house positions - both long and short. Proprietary desk trading contributes greatly to speculative movements in stocks and it would surely be useful to the investing public to know just how much activity is being generated by house traders.

Houses would probably object to any such move and if the exchange sees fit to compromise, the same disclosure threshold for short selling could be used - 0.5 per cent of issued capital.

Last but not least, with regard to enforcement and disciplinary action, it is encouraging to see the proposal that SGX's range of disciplinary actions be widened.

As noted several times before, a disclosure-based regime can only work properly with frequent, strong and decisive enforcement, something which appears not to have been the case in the local market. A check of SGX's website under "Regulation" for example, shows that for the whole of 2012 and 2013, a total of only four cases of disciplinary action were taken, two of which were for derivatives trading. This is arguably too infrequent. Hopefully, this will change from now on.