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Willing buyer-willing seller? Think again

There exists a school of thought that as long as a trade is performed on a "willing buyer-willing seller'' basis, it should be allowed to stand. Assuming this to be true, supporters of this school have questioned whether the trades in Dyna-Mac's shares that I wrote about last month should have been cancelled by SGX ("The curious case of Dyna-Mac's 'error' trades'' 23 Feb). To recap, a stock that normally trades for about 13 cents was done first at $19 in early Feb, then after that was cancelled, done at $20 three weeks later. This was also cancelled and it to SGX issuing a warning that basically advised against anyone trying their luck with prices that are outrageously beyond the current market.

After the dust settled, I was asked whether such trades should be cancelled if in fact they were transacted willingly by both sides. My answer is a resounding "yes''.

Consider the percentage gain for the second Dyna-Mac trade - a 13 cents rise to $20 is 15,285%. At one extreme, apply this to a top blue chip like Singtel at $3.85 and we get $592. In a flash, Singtel's market cap would rise from around $61b to a staggering $9.4 trillion, which would make it bigger than the entire UK stock market. Not only that, imagine the impact on the STI! A very rough guess would be that the index would rise by an insane amount (possibly 50,000 points but I can't be absolutely sure) which no one in their right mind would accept as OK.

The flip side is also worth contemplating - what if a supposedly willing buyer was to try his luck getting Singtel at 1 cent and succeeds in finding a "willing seller'' at that price? If a one cent fall in Singtel translates to a one point loss for the STI, this would cause the index to fall 380 points, prompting panic selling of dozens of other stocks. If this happens and billions of market value are wiped out, would everyone accept that since the trade was apparently willingly done, then there's no need to cancel it? What if DBS is sold for 10 cents on a claimed "willing-buyer, willing seller'' basis? Or UOB for $20,000?

Many other arguments against preposterous trades are possible, including the need to prevent manipulation and false markets but I don't think I need to go further. 

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