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Clearer communication can help in curbing speculation without using a heavy hand
Goh Eng Yeow, Straits Times
04 November 2013
For the many investors burnt by the latest penny stock fiasco, the Singapore Exchange (SGX) looks like a convenient scapegoat to blame.
No matter what measures the SGX takes to try and restore confidence, it simply cannot find favour in their eyes.
Accusing fingers have been pointed at the bourse operator, claiming it failed to act fast enough to query companies experiencing unusual trading activities and then accepted standard replies without trying to probe further.
Complaints have also been levelled at the seemingly arbitrary manner in which the SGX’s rules have been applied: Why, for instance, allow Sky One to continue to trade freely when its price fell by as much as 95 per cent? After all, just a month earlier, the SGX had suspended and then imposed trading curbs on three other stocks - Blumont Group, Asiasons Capital and LionGold Corp - when they suffered similar plunges in price.
Upset investors were also not appeased by the SGX’s attempts to explain why it suspends, designates or investigates a stock. When people are angry, they are simply not in the mood to listen.
Reader Samuel Owen wrote: “The SGX has a lot of explaining to do, not only on the whats and whys of the recent fiasco, but also how it is going to prevent such incidents from happening again.”
Sure, some market pundits are correct in pointing out that stronger signals could have been sent earlier when some penny stocks were soaring to speculative highs, adding billions of dollars to their valuations.
They also contend that the SGX and its regulator, the Monetary Authority of Singapore, could have explained more clearly that lifting trading curbs did not mean that the “all-clear” had been issued - and that any probe into market misconduct is separate and distinct from removing the curbs.
But it is easy for such detractors to speak with the benefit of hindsight. Where were these critics when the stocks were running up and people were making money? As remisier Gary Goh succinctly observed: “It’s funny that people are asking questions now that the shares are falling. When they were rising, nobody asked any questions.”
It is not the intention of this column to rub salt into fresh wounds.
But to give the SGX its due credit, it did, in fact, query most of the companies that were subsequently hit by inexplicable collapses in share prices.
What more could it have done? If it had tried to intervene more actively beforehand, it might have been accused of stifling the market and standing in the way of investors trying to make money.
As its chief regulator, Ms Yeo Lian Sim, once noted: “Intervention with a heavy hand does not add to effective regulation. In market surveillance, the very act of querying listed companies cautions the market about unusual movements in share price or trading volume. The investing public is alerted to trade prudently.”
But then, some market observers are also right to point out that when the SGX does step in, it should spell out its instructions clearly, and preferably brief the brokerages and the media thoroughly before pursuing any action.
That would ensure that it gives no ground to aggrieved investors who accuse the bourse of taking actions that helped exacerbate the market panic.
Take the “designation” curbs the SGX slapped on Blumont, LionGold and Asiasons on Monday, Oct 7, after it allowed them to resume trading. The curbs prohibited contra trading and short-selling, effectively forcing investors to pay cash upfront if they wanted to buy these counters.
Because SGX-imposed curbs are so rare - the last was implemented five years ago - many remisiers were in the dark as to what they entailed.
And because the announcement was made only the night before, on Sunday, few of them were properly briefed by their brokerages on how to advise their clients before opening bell the next day.
The short notice also put a big strain on brokerages as they coped with a sudden flood of cash. One client reportedly brought $200,000 in cash.
The SGX has every right to mandate a ban on contra trading and short-selling, if the situation warrants it. But it should also be mindful of the unintended consequences such as the logistical chaos at broking houses if they are given insufficient notice to implement its decree.
Still, the SGX should be commended for doing its best to bring order to the penny stock market in the past few weeks. Otherwise, the fallout may have been even more horrendous.