Level the playing field on trading curbs
Advance notice on restrictions will add to transparency
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Advance notice on restrictions will add to transparency
By Goh Eng Yeow
07 October 2013
Five years ago, just weeks before the sub-prime crisis erupted in the United States and spawned the worst financial crisis in decades, brokerages here took a drastic decision to impose trading curbs to slam the brakes on a super bull run by penny stocks.
In hindsight, that turned out to be a wise move, as it saved many remisiers and their clients from getting badly mauled by the subsequent global stock market rout as financial assets of all shades and hues crashed.
But rather than feel happy about a safeguard that saved them time and time again from market calamity, remisiers are more likely than not to complain about how much their business is being affected each time brokerages impose the same tough measure whenever exuberance in penny stock trading gets out of hand.
Trading curbs are a regular feature on the local bourse. They typically involve limiting clients’ exposure to a speculative counter by requiring them to make their stock purchases in cash, rather than get the usual three days’ payment grace that forms the bedrock of our contra trading system.
The curbs first made their appearance about 15 years ago when they were imposed by brokerages to curb a penny stock frenzy which erupted after the end of the Asian financial crisis.
They turned out to be crude but effective weapons used by brokerages to protect themselves from the huge “contra” losses once suffered by their clients each time a stock market rally reversed gears.
Still, there may be some justification behind the remisiers’ gripes.
Mr Jimmy Ho, the president of The Society of Remisiers (Singapore), observes that remisiers do not begrudge the broking houses for managing their credit exposures and risks by resorting to trading curbs.
But what irks many traders is the arbitrary manner in which the restrictions are being imposed, as brokerages are given a free hand to slap on the curbs whenever they see fit.
Experience has shown that when a large retail-based brokerage imposes such a curb in the middle of trading, it can create panic as traders try to unwind their positions ahead of the squeeze which takes place as contra trading is disallowed and cash payment is required for purchases. This causes the affected stocks to plunge as the speculative fervour is stamped out.
One good example would be Rowsley, which suddenly plunged by 17.5 per cent in a single day in March, following the curbs slapped on it by UOB Kay Hian during trading hours.
Equally disconcerting is the spate of unsubstantiated allegations that parties with advance knowledge of the trading curbs have been able to profit from by “short-selling” the affected stocks, then buying them later at a much lower price after they have plunged.
So what should be done?
Now, some will argue that if there are fundamentals supporting the run-up in a stock in the first place, it should not have fallen sharply when a trading curb is imposed on it.
But then a market is driven as much by sentiment as by cool logic, and the price of a stock is likely to be affected equally by its business fundamentals, as well as actions taken by a brokerage which may influence the way the investing public views the stock.
As such, there is merit in the argument that trading curbs should be treated as “material information”. When trading curbs first made their appearance 15 years ago, there were about 30 broking firms serving retail clients like those who invest in penny counters.
But over the years, this number has dwindled to just nine as the financial landscape changed and brokerages consolidated to fight competition.
This means that any action taken by one of the bigger broking houses now to curb trading on a stock will inevitably reverberate throughout the market and sometimes cause mayhem, as traders scramble for the exit, in case some of the other remaining houses follow suit.
But there are no clear directions from the regulators on how trading curbs should be handled, even though calls were first made as long as 15 years ago for such precautionary measures to be regulated.
It is time for the Singapore Exchange (SGX) and its regulator, the Monetary Authority of Singapore, to examine the steps needed to level the playing field on trading curbs.
For a start, let’s at least consider making it mandatory for broking houses to announce on the SGXNet any trading curbs they plan to make, to ensure the widest dissemination of the information possible.
Announcements should include the names of the stocks involved and details of the measures to be imposed.
Such a move will hopefully make the trading curb process more transparent to all concerned.