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Designated stock saga exposes weaknesses
THE ongoing affair involving the three stocks which the Singapore Exchange (SGX) has categorised as "designated securities", namely Asiasons, Blumont and LionGold, has highlighted several weaknesses in the system which should be addressed.
- Trading curbs by broking firms. Even before the SGX stepped in over the weekend with its designations, broking firms had placed the three as well as several other speculatives that were threatening to boil over on their internal watchlists.
In most cases, this meant that the affected stocks could not be traded using online accounts. In other extreme cases, curbs mean that clients have to pay for their purchases upfront and "contra" trading is prohibited.
All of this is within the prerogative of broking houses which, when witnessing the inflation of large bubbles, might be uncomfortable with their exposure and so should act to limit their risk.
However, since news of trading curbs inevitably leads to falls in the share prices of the counters involved, the decision to restrict trading should be viewed as price-sensitive and material, and there should therefore be rules to govern the announcement of such curbs. As it stands, there are none, and parties who have advance knowledge of in-house trading curbs have an unfair advantage over the rest of the market.
- CPFIS status. Asiasons and Blumont qualify as approved investments under the Central Provident Fund Investment Scheme (CPFIS). This might be news to many as well as disconcerting to those who hold the view that approved CPF investments should, as far as possible, be limited to instruments with a stronger track record than these companies, or at the very least, be financially resilient enough to withstand the type of shocks suffered by the two over the past week. This of course leads to the question - should CPFIS qualifying criteria be more stringent?
There are currently four criteria for inclusion - the company has to be incorporated in Singapore; the shares have to denominated in Singapore dollars; the shares have to be listed on the mainboard; and the company has to allow CPF investors to attend its shareholder meetings.
These are not difficult conditions for many companies to satisfy so the quality bar is arguably not set very high.
In response to an article run in this column more than two years ago about the need to tighten qualifying criteria in the wake of the S-chip scandal, CPF defended the status quo, saying in a letter in BT on April 21, 2011, that "any inclusion criteria cannot guarantee that an individual stock will not run foul of regulatory, accounting or corporate governance standards throughout time". It also said that investors have to do their homework carefully before investing.
Fair enough, but if the regulatory regime is lax and given that SGX is itself a commercially driven entity, is it good enough to just say "caveat emptor" when it comes to people's retirement money?
- SGX's Q-and-A process. Over the years, SGX has relied on querying companies on odd price movements by despatching a standard set of questions. Most of the time, replies are nothing more than shoulder shrugs (or at most, contain vague references to "ongoing negotiations" which may or may not lead to anything) and the matter then rests. Even so, SGX believes the Q-and-A ritual is effective because it works as a signalling mechanism to the market that the exchange is watching and that buyers should beware.
But without strong follow-up disciplinary action and bearing in mind that manipulators rarely move prices up in large quantities at any one time, preferring instead to fly under the radar by advancing prices in small increments to avoid drawing attention to their actions, is it really such a magnificent signalling-cum-warning mechanism? Or does it occur so often without consequences that punters nowadays barely pay SGX queries any notice?
- Designated securities. The exchange, presumably motivated by a need to protect punters from their own folly, unilaterally suspended trading in the three stocks before classifying them as "designated securities". This is commendable, but because it was not well handled, it bred massive uncertainty once the halt was lifted.
Traders were told that purchases have to be paid for and that no contra trading would be allowed, which upset many who, quite logically, argued that if shares are bought and paid for immediately, they should be able to be sold once payment is made. Greater clarity on this point would have been welcome, as would answers to legitimate questions such as: what exactly are the reasons that led the exchange to designate the three stocks (was it simply that they were plunging?); why was the halt lifted so quickly without those reasons being made known; and how long will the designated status last.
- Contra trading. Over the past few days, attention has focused on this controversial practice, with some calling for it to be eliminated. On the one hand, if SGX is to properly call itself a developed exchange, it has to heed those calls since contra trading is an archaic system that allows punting (some might say gambling is a better word) with no capital upfront and only exists here and in Malaysia.
On the other, scrapping contra would eliminate a large speculative element and, in the view of its proponents, rob the market of liquidity.
It will be interesting to see what emerges from the contra debate, though this should not detract from the other issues raised earlier that also require regulatory attention. Hopefully, these issues will be resolved and the outcome will be a more efficient and transparent market for all.