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Building confidence through tough regulatory action

Last week, BT reported that the MAS and CAD had raided the offices of a few local brokers, most probably as part of an investigation into possible breaches of the law. It isn't known what these breaches might be - the speculation being market manipulation and rigging -  yet the response to the raids has been odd, to say the least.

Some TRs and their clients were critical, implying that it is "a waste of time'',  "too little too late'' or that regulatory energies would be better spent bringing to justice the parties behind the S-chip collapse and other scandal-tainted stocks. A Bloombeg Gadfly article in the meantime, said this is the last thing SGX needs, seeing as how confidence is already low and business depressed. Investors would be "exasperated'' at the news of the raids said the article, and would wonder why Singapore's reputation for being corruption-free doesn't extend to the stock market.

To me, such responses are hard to understand because they imply that it would be better to do nothing and, assuming the speculation that the raids pertain to breaches of the law  is founded, allow an uneven playing field to thrive. This is patently absurd in my book - unless of course one subscribes to the view that false markets, insider trading and price rigging are desirable features of a stock market, in which case we enter the realms of hypocrisy that I discussed in an earlier blog posting, a realm which cannot exist in the real world. I also don't think many investors would be exasperated to discover that rigging, manipulation etc goes on here because to expect the Singapore stock market to be 100% corruption-free makes no sense. Even in the most developed markets like London and Wall Street, breaches of the law regularly surface. In short, how many people really expect perfect honesty in an arena that exists on exploiting greed and fear?

The reason why people will always indulge in illegal market activities is of course because the rewards are substantial and in the minds of participants sufficiently high to outweigh the risks. Which is why despite the massive trauma, crashes and financial losses that occur when regulators step in with a crime-busting move, manipulators will still try their luck. They have done so for decades and will continue for years to come and it is incumbent upon regulators to do their best to stop them.

In some cases, the activity is easily detectable and therefore actionable. In others, it is not. It is always easy to fire crticism from the sidelines without full knowledge of the constraints under which investigators operate - because multiple agencies and jurisdictions are often involved, it can take years to investigate some cases and even then there's no guarantee that wrongdoers would be convicted. So whilst observers would like all crimes and guilty parties to be exposed, it may not be possible because building water-tight cases all the time is impossible.

But at least, the effort is being made and instead of confidence being eroded by last week's raids, I think it should be enhanced. It is only through tough regulatory action that confidence and trust in stocks can be built and the more people that recognise this, the better.

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