SGX’s new ‘Trade with Caution’ notices are no laughing matter
When the Singapore Exchange (SGX) started issuing its “Trade
with Caution” (TWC) notices a couple of years ago, the move was greeted with
derision, cynicism, and a fair bit of laughter. Comments went something along
these lines: “It’s a waste of time - SGX queries the company on reasons why its
shares are in play, the company says it doesn’t know why, then a TWC is issued.
No big deal.”
Comments
R. Sivanithy
17 February 2016
When the Singapore Exchange (SGX) started issuing its “Trade with Caution” (TWC) notices a couple of years ago, the move was greeted with derision, cynicism, and a fair bit of laughter. Comments went something along these lines: “It’s a waste of time - SGX queries the company on reasons why its shares are in play, the company says it doesn’t know why, then a TWC is issued. No big deal.”
Well, now it is a big deal. Over time, TWC has evolved from being a generic caution to the market that appeared to lack bite (and so was not taken seriously) into a targeted, specific warning with detailed trading data that suggests laws may have been broken and hints of more regulatory action to come.
Judging by the impact it has had, it is having its desired signalling effect. Clearly, this is now serious business.
So far this year, two TWCs have been issued, for Koyo International and Zhongmin Baihui. In both cases, SGX pointed out that in recent months, when markets everywhere were collapsing, these stocks were immune to the carnage, either rising or staying flat.
Of course, outperformance does not automatically spell something untoward - because, although such instances are rare, strong support in a very weak market is arguably conceivable. Sometimes, for example, speculative hopes of a takeover or news of some major deal can result in a particular counter rising or staying afloat when everything else is sinking.
But the clincher was revelations by SGX that a large part of trading was being generated by a handful of individuals who appear to be connected to each other. In Koyo’s case, this was followed by an announcement by the company that its managing director was being investigated by the Commercial Affairs Department (CAD) and the Monetary Authority of Singapore (MAS) for possible offences under the Securities and Futures Act.
The outcome in both cases was predictable: the stocks have crashed, just as IHC did last September, when the exchange issued a similar announcement. Back then, it was called a Regulatory Announcement; today it’s called a TWC notice. Whatever the title, it is a signal to the market that “the exchange knows what’s going on, and will step in to pull the plug, if necessary”.
In this connection, we are reminded of a comment by the boss of a local brokerage, who once told BT that “SGX has perfect knowledge of who is trading with whom” because it runs cutting-edge surveillance technology. We are also reminded of this comment by an exchange official: “We may appear to be slow sometimes - but we’re not stupid.”
Worth asking
A few questions come to mind readily.
First, how many more of such artificially supported stocks are there? Anecdotal evidence from market sources suggests “quite a few”.
This, of course, may be an exaggeration because although there are stocks which have displayed peculiar support in a crippling bear market, without knowledge of who is trading with whom, it isn’t possible to draw firm conclusions. The true answer to the question can only be discerned in hindsight, depending on the number of forthcoming TWCs.
Second, why do houses expose themselves to this kind of risk? Backroom staff, compliance departments and margin trading personnel must surely be aware of the actions of those involved.
There is no easy answer to this. One defence is that in a weak market, you take whatever comes your way, even if it’s suspect business.
There may be a warped logic to such reasoning but it doesn’t take much reflection to conclude that it is preposterous to argue that it’s OK to expose oneself and one’s house to massive risk by taking on potentially illegal activity just because the market is bad and income is low.
Again, there is no simple answer. Perhaps the expected rewards were thought to be worth the risk of detection.
No matter, the regularity with which SGX is issuing its new and improved TWC notices and the punishing impact they are having should be a massive wake-up call to the market. It’s also a safe bet that the “operators” at the receiving end are not laughing, by any stretch of the imagination.