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Plug gaps to safeguard interests of all players
Goh Eng Yeow
27 January 2014
The law regulating brokerages not licensed to operate here is clear enough, but in our increasingly borderless financial world, lines are being blurred.
As it stands, the rule states that as long as these offshore brokerages are responding to only “unsolicited enquiries or applications from persons in Singapore” or servicing foreign clients who subsequently relocate to Singapore, they do not have to submit themselves to the regulators here.
This arrangement has worked well for years. It assumes - quite fairly - that the bulk of trades in Singapore-listed shares will be transacted through local brokers by people living here.
As recently as 10 years ago, this assumption would still hold true, since access to the Singapore Exchange (SGX), where all the trading orders are matched, is confined to an exclusive group of brokerages known as “clearing members”.
Under such circumstances, it would be more costly and time-consuming for a person here to use an unlicensed foreign broker to buy a locally traded counter.
But the rapid technological advances have changed the financial landscape completely and blown such assumptions away. Foreign brokerages can now get their computers to piggyback on a local brokerage’s platform to gain access to the heart of the SGX’s trading engine.
Thus, it makes no difference whether a trader is keying in his order from Tokyo, London or New York.
In all likelihood, his trades will be executed at the same speed as if he were stationed in Singapore.
This also means that algos, or high-frequency traders, who use super-fast computers to do their trades, can easily make their way here if they wanted to. They are already a significant force in bigger markets such as New York and London.
But the issue has always been about how to bring the algos and their chaotic trading activities into the ambit of our regulatory framework to safeguard the interests of all the other players in the stock market.
This explains the misgivings expressed over them even though the SGX flagged its enthusiasm to welcome them with open arms, arguing that they might improve trading liquidity and make it easier for investors to enter and exit the market.
Now, the debate has deepened as it emerges that even before algos make their appearance here, there are a few instances where unlicensed foreign brokerages already account for the bulk of the trades on some counters.
Take United States-based Interactive Brokers, which is pursuing a group of investors here to recover $79 million of losses that it claims they incurred after the stocks of Blumont Group, Asiasons Capital and LionGold crashed last October and caused over $8 billion in market value to be wiped out.
By Interactive’s own admission, Singapore-based Algo Capital, the financial adviser who acted on behalf of these investors, accounted for much of the traded volumes in Asiasons, Blumont and LionGold on some days.
It also emerged that until the three counters collapsed, Interactive might have done very well out of the trading on the three stocks.
Ms Quah Su-Ling, one of the investors it was suing, claimed the US broker allegedly made commissions worth $776,152 on trades done in her account between October 2012 and Oct 4 last year.
It is not for this column to discuss the merits of their claims and counterclaims. But what is clear is that the value of the SGX trades that went through Interactive’s trading system last year were significant enough to warrant asking if unlicensed foreign brokers should be allowed to deal in such a big way on the Singapore market on an unregulated basis.
Additionally, Interactive lent large sums to the investors concerned to trade in the local market.
Neither is the dispute confined to Interactive and the investors it is suing. The fiasco has ensnared the rest of the investment community because about $100 million in contra losses were said to have been chalked up when the three counters crashed last October.
A Monetary Authority of Singapore (MAS) spokesman told The Straits Times that “any person who conducts securities broking business in Singapore or solicits such business from investors based in Singapore is required to be licensed under the Securities and Futures Act (SFA)”.
An offshore broker that does not have to be licensed under the SFA is still subject to laws here against market misconduct such as market manipulation and insider trading, he added.
But the Asiasons/Blumont/LionGold trading fiasco appears to have exposed gaps in the regulatory framework which need to be plugged.
Failing to do so will only store up trouble for the future.