Enforce level playing field before suspension

All the recent debate surrounding the trading suspensions of China stocks Hongwei Technologies and China Hongxing and how best to accommodate the interests of small shareholders should not divert attention from an equally important point raised by a BT reader earlier this week: the need to investigate the sharp price falls suffered by both counters in the run-up to their suspensions.

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Guanyu said…
Enforce level playing field before suspension

By R SIVANITHY
03 March 2011

All the recent debate surrounding the trading suspensions of China stocks Hongwei Technologies and China Hongxing and how best to accommodate the interests of small shareholders should not divert attention from an equally important point raised by a BT reader earlier this week: the need to investigate the sharp price falls suffered by both counters in the run-up to their suspensions.

In a letter published in BT on Tuesday (‘Unusual share price movements need looking into’), the point was made that as part of their investigations into possible breaches of the rules surrounding the two suspended counters, regulators must also probe how it was that both stocks collapsed in ever-increasing volume before they were suspended.

Ultimately, the questions which need to be answered here are: were any parties privy to price-sensitive information that was not publicly available at the time, and did those parties as a result gain an unfair advantage?

There is a school of thought which holds that rises or falls in share prices just before a material announcement are not unusual and could well be a feature of an efficient market. After all, prices often trend upwards ahead of a company’s results announcement when those results are expected to be better than expected. So rises could simply be due to analysts scrambling to revise their figures in light of the latest information.

Also, when sentiment is weak and fragile, the slightest negative rumour could easily send prices plunging. In the case of the two S-chips whose prices were already depressed by a number of accounting concerns and governance issues reported by others in the segment, the plunges could simply have been the result of a nervous market looking for an excuse to sell and actually doing so once it got wind that a suspension was impending.

None of these possibilities, however, should detract from the fundamental principle of ensuring a level playing field for all investors and shareholders, both large and small.

If all the selling was aboveboard, then an examination of who the larger sellers were during the period in question should be able to quickly clear the issue. Hopefully, regulators at the Singapore Exchange (SGX) will give this point the close scrutiny it deserves.

Speaking of level playing fields, SGX has taken a bit of stick in the past few days for not considering whether trading in the two S-chips might be allowed to continue with carefully calibrated restrictions so as to allow small shareholders the chance to bail out.

There is no clear-cut answer to this; on the one hand, SGX has a duty to ensure that a market for its stocks is fair, orderly and transparent (which may not be the case when question marks hang over a company’s finances), while on the other hand, shareholder interests have also to be considered.

One solution is to try and find a workable middle ground. This could involve imposing an immediate suspension to limit damage from excessive speculation, but with the introduction and strict enforcement of a specific time schedule for regular progress updates from the company and the Exchange on the status of investigations.

These updates could be issued every four weeks or so and a review made by the authorities at the time of each update as to whether full resumption of trading is feasible or whether partial trading (that is, with certain restrictions) might be possible.

Whatever the steps taken, it is important at all costs to ensure suspensions do not drag on for too long - in some unfortunate cases, suspensions have been in place for years - since an opaque, indefinite halt on trading is ultimately detrimental for all parties, including SGX itself.

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