Scrapping stock trading link means a missed opportunity

HAVING scrapped the high-speed rail (HSR) link with Singapore, Malaysian Prime Minister Mahathir Mohamed announced last week that he now wants to review the planned stock market trading link between the two countries, which is supposed to be operational by the end of the year.

This might end up on the back-burner. What if it does - or ends up being scrapped altogether, both of which are possible?

The trading link, first proposed in February after a retreat between Prime Minister Lee Hsien Loong and his then counterpart Najib Razak, was generally well received by the financial industry in both countries. It would give investors - including those outside Malaysia and Singapore - access to some 1,600 listed firms with a total market capitalisation of more than US$1.2 trillion (S$1.6 trillion).

Bursa Malaysia's chief executive Tajuddin Atan said the trading link would enable investors to trade and settle shares listed on each other's stock markets more conveniently and cost-efficiently.

SGX chief executive Loh Boon Chye said the link will create wider interest in listed companies and boost trading in both markets. CIMB Group Holdings chairman Nazir Razak said it will bring "real upside" for stakeholders in both markets if it allows for better cross-border fund-raising mechanisms.

Some brokers liked the idea of the trading link too. For example, John Chong, chief executive of Maybank Investment Bank and Maybank Kim Eng Group, said the link would enable the group to serve its clients better and enhance its product offerings.

The proposed link would also fix some of the flaws in the Asean Trading Link (ATL) among Malaysia, Singapore and Thailand, which was established in 2012 but was quietly shut down in last October.

The ATL had the ambitious vision of eventually connecting the stock markets of six Asean markets, including also Indonesia, the Philippines and Vietnam. But only the countries with more technically advanced exchanges (Malaysia, Singapore and Thailand) signed up for it at first.

The ATL didn't seem to impress investors. Trading volumes did not go up as much as expected and investors continued to invest as they always did - through their existing brokerage relationships - rather than through the ATL.

Part of the problem was that the ATL did not address post-trading issues such as clearing, settlement and custody.

But the proposed Malaysia-Singapore link aimed to do so, which would make it more user-friendly. As Malaysia's Securities Commission chairman Ranjit Singh said: "Investors will essentially be able to trade equities from another stock market and settle it in local currency, as if trading in the local market."

So why then would Dr Mahathir want to review the trading link? He has so far not given a reason. But history might give us some clues.

THE GHOST OF CLOB

The only trading link between Malaysia and Singapore that has ever been operational was the Central Limit Order Book (Clob), which was basically an offshore market for Malaysian shares established in Singapore in 1990.

But during the Asian crisis in 1998, when Dr Mahathir was Malaysia's Prime Minister, this market was declared illegal by Kuala Lumpur and abruptly shuttered just before Malaysia imposed capital controls in October 1998. Investors who had bought Malaysian shares on Clob had their holdings (totalling US$2.6 billion) frozen and were left in limbo, a development which The Economist magazine memorably described as "daylight Clobbery".

One of the reasons Malaysia closed down Clob, it was alleged, was that Singapore investors had been short-selling Malaysian shares in this offshore market, and had thus precipitated the decline in the Kuala Lumpur Composite Index (KLCI), which had tanked 79 per cent between its pre-crisis peak on Feb 25, 1997 and its crisis low on Sept 1, 1998.

This allegation was unfounded. First, all Asian markets (including Singapore's) fell sharply during that period, not only Malaysia's. Second, a thorough analysis by The Business Times after the closure of Clob found that between January 1997 and August 1998, Singapore investors bought more Malaysian shares than they sold, even as the KLCI was declining. Short selling was negligible.

Moreover, 98 per cent of the investors who bought Malaysian shares on the Clob were not institutions, but retail investors, who don't have the financial firepower to crash markets.

But while Kuala Lumpur's allegations against Singapore investors in the past might have been baseless, in the future, the theoretical possibility remains that if Malaysian shares are freely and legally traded in Singapore, as under the proposed trading link, short-selling could happen, driven not only by individuals but also by institutions, which now have a greater presence in Singapore than in 1998. This may be one reason Malaysia wants to review the trading link; Dr Mahathir could still be haunted by the ghost of Clob.

But there may be other reasons, and for these we should go back to the history of the ATL. Why didn't Indonesia, the Philippines and Vietnam sign up?

Apart from the problems with post-trading issues such as clearing and settlements, as well as differences in regulatory policies and corporate governance standards, a key reason was that there was little support for the link from the respective brokerage industries and the investing community. The ATL was a top-down construct rather than something that was created in response to market demand.

To some extent, the same is true of the Malaysia-Singapore link. While there is certainly demand from the investing public to access stocks in both markets, brokerages in the two countries already have long-standing arrangements that would enable this, and which have worked quite well. Thus from a transactional point of view, while the link would make trading easier and more efficient, it's more a "nice-to-have" than a "must-have".

In the case of the ATL, there were also concerns that inequalities in size and liquidity of the various exchanges would pose problems for the weaker exchanges. For example, if there were seamless stock trading across Asean, listings could gravitate to the stronger and more liquid exchanges like Singapore, which would retard the growth of smaller exchanges. The smaller exchanges prefer to develop to a more mature level before integrating with their larger counterparts.

In the case of the bourses of Malaysia and Singapore, there is not a vast difference in size. Singapore's market capitalisation is about 20 per cent larger. However, some Malaysian policymakers may feel that creating a trading link would work more to the advantage of Singapore than Malaysia.

But this view ignores the many win-win possibilities that a trading link would create, such as the ability of companies to tap a larger pool of liquidity for fund-raising, lower funding costs at a time of rising interest rates and a more attractive market for international investors, which would also serve as a pilot for the eventual linking of more Asean exchanges.

Scrapping the trading link would thus be a missed opportunity.