Portfolio pumping in Singapore not as widespread as feared: CFA Institute

Portfolio pumping, or the artificial inflation of the closing prices of selected stocks usually at quarter-ends and year-ends, is not as widespread in Singapore as currently perceived, according to a report by CFA Institute.

The report, a first-of-its-kind that analyses the degree of market manipulation in the Singapore stock market, examined tick-by-tick data, amounting to over 12 billion data points from the Singapore Exchange (SGX) covering 189 listed companies under the FTSE Straits Times All-share Index, from January 2003 to December 2013.

It found that the characteristics of the stocks with potential to be subject to portfolio pumping include those from the mid-cap market segment especially within the S$2 billion to S$5 billion range, have lower free float liquidity and are not constituents of the SiMSCI. Portfolio pumping also appears to be higher among stocks that have performed poorly until the second-to-last day of the quarter.

Other characteristics associated with higher portfolio pumping include stocks with smaller capitalization and lower free-float liquidity as well as being Catalist-listed and being a non-constituent of the MSCI Singapore Free Index (SIMSCI).

"Such potential pumped stocks also have a significantly higher degree of buyer-initiated trades on the day of pumping with a higher standardized trade volume,'' according to the report.

The proportion of trades happening in the final 30 minutes on the last day of a quarter also appears significantly higher among possible pumped-up stocks.

An additional interesting insight is that even though the S-chip division as a universe did not show any significant signs of portfolio pumping, it did seem to have a reasonable representation among the stocks with the highest pumping potential, as measured by our two-day inflation metric.

"We found that portfolio pumping was not as prevalent as what the overall market may think due to effective deterring measures and enforcements in place. However, at a certain segmented market level, the report identified some level of potential portfolio pumping, though those were not statistically significant. In those cases, we suggest increasing market surveillance to make it difficult and expensive to undertake portfolio pumping activities." Alan Lok, Director, Capital Markets Policy of CFA Institute, said.

The report also noted the effectiveness of market surveillance efforts by the Singapore Stock Exchange (SGX) and enforcement efforts undertaken by the Monetary Authority of Singapore (MAS) in keeping potential manipulators at bay.

"We found that the existing operation of the SGX market surveillance and MAS enforcement process seem to be working well in regard to quarter-end closing prices. Other exchanges and markets may want to adopt and refine some of these measures to stifle potential market manipulation," Dr Tony Tan, Head of Standards and Advocacy with CFA Institute, said.

The study found evidence from MAS's experience that the successful prosecution of a stock manipulator and the existence of market microstructure that would render portfolio pumping activity to be a relatively expensive affair have a strong positive impact on market integrity.

The research originates from a landmark court case involving MAS as plaintiff and Tan Chong Koay and Pheim Asset Management Sdn Bhd (defendants). In August 2009, a formal civil suit was filed against the defendants for creating a false or misleading appearance relating to the price of a security. On Sept 17, 2010, the defendants were pronounced guilty of priming the stocks of United Envirotech (UET) over a three-day period from Dec 29, 2004 to Dec 31, 2004.