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SGX's Trade with Caution - once laughed at but not anymore

When SGX started issuing its "Trade with Caution'' notices a couple of years ago, the move was greeted by most market players with derision, cynicism and a fair bit of laughter.

When SGX started issuing its "Trade with Caution'' notices a couple of years ago, the move was greeted by most market players with derision, cynicism and a fair bit of laughter. Comments went something along these lines:  "It's a waste of time - SGX queries the company on reasons why its shares are in play, the company says it doesn't know why, then TWC is issued. No big deal''.

Really? Well, now it is a big deal. The much-maligned TWC now replaces the previous Regulatory Announcement and I would think it is having its desired effect of injecting caution into trading. This is now serious business and I don't think it's a laughing matter anymore.

So far this year, two TWCs have been issued, for Koyo International and Zhongmin Bhaihui. In both cases, SGX pointed out that in recent months when markets everywhere were collapsing, these stocks were immune to the carnage, either rising or staying flat. This does not automatically mean something fishy because although such instances are rare, strong support in a very weak market is arguably conceivable - sometimes for example, speculative hopes of a takeover or news of some major deal can result in a particular counter rising or staying afloat when everything else is sinking.

But the clincher was a declaration by SGX that a large part of trading was being generated by a handful of individuals who appear to be connected to each other. Interestingly, Koyo on Wednesday announced its managing director is being investigated by CAD and MAS for possible offences under the Securities and Futures Act.

The outcome in both cases was predictable - the stocks have crashed, just as did IHC last Sept when the exchange issued a similar announcement. Back then it was called a Regulatory Announcement; today it's called a TWC notice. Whatever the title, it signals to the market that the exchange knows what is going on and will periodically step in to thwart the intentions of those behind the trading. In this connection, I remember the boss of a local brokerage telling me a couple of months ago that "SGX has perfect knowledge of who is trading with who'' because it runs cutting edge surveillance technology. I am also reminded of what an exchange official once told me about taking time to intervene: "we may appear to be slow, but we're not stupid''.

A few questions come readily to mind.

The first is how many more of such artificially supported stocks are there? Anectodal evidence from market sources is "a lot'' though I have no idea if this is an exaggeration or an accurate assessment. I've been told that it isn't just second liners that are propped up but even blue chips. Yes there are some stocks which have displayed unnatural strength in a crippling bear market but without knowledge of who is trading with whom, it isn't possible to draw firm conclusions. I guess the answer to this question will only become clear in time, if and when more TWCs are issued.

Second, why do houses expose themselves to this kind of risk since I'm pretty sure backroom staff and compliance departments are aware of the actions of those involved? There are no easy answers to this - one defence is that in a weak market, you take whatever comes your way, even if it's suspect business. I find this line of reasoning preposterous since it amounts to saying it's OK to expose oneself and one's house to massive risk by taking on potentially illegal activity just because the market is bad. 

Third of course, is how those responsible could have reasonably expected to get away with their actions since stocks that go against the general market's direction would definitely attract attention, and all it takes a bit of digging using the sophisticated systems at the exchange's disposal to find out where the support is originating. To this I have no answer - perhaps the expected rewards were thought to be commensurate with the risk of detection.

No matter, the regularity with which SGX is issuing its new and improved TWC notices should logically be a massive wake-up call to the market. And I don't think those at the receiving end of the new and improved TWCs are laughing by any stretch of the imagination.


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