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Cash payment for all purchases?

Conversations with dealers are always useful as all of those that I keep in touch with are vastly experienced with plenty to offer. Last week, I received two suggestions that bear thinking about as they are not unrelated - cash only for Watch List stocks as well as those trading under a regulatory cloud, and perhaps more controversially, that contra should be scrapped.

The cash-only suggestion is interesting because one of its aims is to signal to potential buyers that the counters in question are being watched by the authorities. Those on SGX's Watch List are there because of profit/going concern worries, whilst those which have been the subjects ot Regulatory Announcements are likely to have been cornered and manipulated. As such, the "cash only'' suggestion is aimed at protecting naive investors from over-trading in these potentially hazardous stocks. It's a good, well-intentioned idea but I don't think SGX should mandate this; instead, it should be left to broking houses to impose whatever restrictions they might deem necessary. The exchange however, could play a part by placing a marker next to the relevant stocks as an alert.

As for the second suggestion about abolishing contra, well, when you come to think of it, why limit only suspect/dodgy stocks to the cash only requirement? Why not the whole market? The argument here is that Singapore and Malaysia are the only two markets in the world that allow "contra'' trading, which essentially allows punters to buy shares on credit (even if they have the cash). This is a very sensitive issue as it affects the business and therefore livelihood of thousands of TRs, yet it was a TR who made it. In an impassioned plea to me to write about it he said "contra is one of the worst market evils'' that has to be scrapped, the sooner the better.

Actually, I've written about this a few times, once pointing out that when SGX was formed in 2000 the settlement period was shortened from (t+5) to (t+3) with the eventual goal of moving to (t+1) but even now, 16 years later, this has not yet happened. I'm sure the technology already exists to do this and there are many advantages to moving to (t+1) and doing away with contra - TRs will no longer bear credit risk as clients would have to pay for everything in cash, there will be no more contra losses to manage (some TRs spend years to work off their clients' losses) and the market moves closer in line with international practice.

The case in favour of contra is that ours is a very small market whose TRs depend on being able to offer clients attractive trading terms. If TRs and houses can manage their risks, then why meddle - "if it ain't broke, then don't fix it''. Interestingly, the TR who asked me to write about scrapping contra was ferverntly in favour of the system not long ago but having been stung by a large loss, has now changed his mind. Moreover, he isn't the first - I have been approached by others who feel that contra encourages unhealthy, excessive speculation that eventually ends in disaster.

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My view is that eventually, technology will render contra obsolete. The day will come when CDP accounts, broking firm trading platforms and bank accounts will all be linked, when naked short-selling will be difficult if not impossible, when settlement is (t+1) or even (t+0) where payment is made on the day of purchase directly from the buyer's bank account, and when contra will fade into the market's memory. 

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