Brakes put on penny stocks
Broking houses impose stiff curbs on purchases amid price gyrations
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Broking houses impose stiff curbs on purchases amid price gyrations
Goh Eng Yeow, Straits Times
01 November 2013
Trading in so-called penny stocks, which typically sell for less than 50 cents, has slowed sharply, as nervous brokerages place tough restrictions on buying them.
Investors have to pay cash upfront for many stocks once their purchases exceed a given level, and Internet buying is barred.
The penny stock market has been in turmoil since early last month when the Singapore Exchange (SGX) took the rare step of suspending three stocks and then imposing trading curbs on them.
Their share prices had soared during the year, but the SGX temporarily suspended trading when they suddenly crashed.
Those three - Asiasons Capital, Blumont Group and LionGold Corp - have since largely stabilised at much lower levels, but wild price gyrations are hitting other penny stocks.
So broking houses such as Lim & Tan, DMG & Partners and AmFraser Securities have now followed UOB Kay Hian - Singapore’s largest brokerage with about 1,000 remisiers - in imposing trading curbs.
Usually, clients have three days to settle a share purchase. During this time, they can sell shares just bought at a profit or a loss - a practice known as “contra” trading. This can lead to high levels of speculative trading.
UOB Kay Hian has 54 counters on its restricted trading list, while DMG & Partners Securities’ list has 41 penny stocks and Lim & Tan Securities has 55.
AmFraser has slapped restrictions on 11 counters, while CIMB Securities has done so for seven.
The curbs have got remisiers up in arms as they spark off more jitters in an already nervous market, driving away clients from trading penny stocks - the mainstay of the business for many.
The FTSE ST Catalist Index, which tracks 115 of these stocks, has fallen about 8 per cent so far this week, after broking houses started in earnest to curb penny stock trading activity.
Mr Jimmy Ho, president of the Society of Remisiers (Singapore), said: “I have no quarrel with brokerages imposing trading curbs to protect their downside risks. But if a house designates as many as 60 counters, this is overkill and dampens market sentiment considerably.”
This effectively shutters contra trading on the entire penny stock market, since the unaffected ones are not actively traded.
Worse, once a broking house imposes these curbs on a stock, it is “non-marginable”.
That means a client who has pledged the shares as collateral to borrow money will have to repay the loan immediately. Otherwise, he will be forced to sell the shares to raise the money. This, in turn, can spark further mayhem, with the forced sale causing the affected stock’s price to crash, as buyers are in short supply.
OCBC remisier Vincent Khoo said: “All these actions by the broking houses show that they are now scared of extending unbridled credit, especially for speculative penny stocks.”
This is despite an earlier statement by the Securities Association of Singapore (SAS), representing the nine brokerages serving retail clients, claiming that “there seems to be a misguided perception that contra trading was the singular cause for the bubble”.
Said Mr Khoo: “The SAS says contra trading is not the cause, yet the actions of the broking houses suggest otherwise.”