Time for structural review of local bourse

PHOTO: Time for structural review of local bourse

SINGAPORE - A structural review of Singapore's stock market is needed given the plethora of flaws exposed by the recent penny stock fiasco.

One big issue is over the need to reform contra trading - the principal means of trading here.

Under this practice, brokers give their clients up to three days' grace to pay for stock purchases while allowing them to offset any sales they make against purchases in the meantime. This inevitably fuels speculative trading.

Any reform to contra trading is likely to be an emotive issue as it involves the livelihood of 4,000-plus retail brokers who service the investing public here.

While some market pundits have blamed unbridled speculation fuelled by contra trading for triggering the recent penny stock bubble, others such as the Securities Association of Singapore (SAS) pointed out that other practices, such as margin trading, were just as much to blame.

Margin trading is where investors use stock as collateral to borrow money to buy more shares.

Linked to this issue is the debate over the role played by broking houses in deflating the speculative investing bubble by imposing trading curbs to limit their downside risks.

Do their actions spark panic and exacerbate the crash, and should their curbs be subject to more scrutiny and regulations?

Readers such as Mr Vincent Khoo have argued that all contra trading does is to encourage traders to speculate excessively with borrowed money and no collateral.

He said: "Institutional players do not need to depend on contra trading. It is mainly retail clients who indulge in contra trading in speculative penny stocks, and syndicates who use it effectively against the small players who end up as bait for these big fish."

Mr Khoo noted that the SAS observes that contra trading is not the cause for fuelling the recent penny stock bubble. But the trading curbs imposed by the broking houses it represents suggest otherwise, he added.

Tied to the contra trading issue is the furore over the preponderance of penny stocks on the Singapore Exchange (SGX) which entices retail investors to take huge bets on them each time speculation hits fever pitch - and the steps which the SGX now wants to take to regulate their trading.

Sure, we live in a caveat emptor, or "buyer beware", regime but the big question is whether it is healthy for the market to have stocks trading for as little as 0.1cent and whose sole purpose for existence is to give stock punters a means to make a wager.

Reader John Loke noted that ultra penny stocks were created two years ago, when the minimum difference between a buyer's bid and a seller's offer for stocks priced below 20 cents was cut to just 0.1cent. "No wonder, people refer to us as a Mickey Mouse market," he said.

Now, questions have been raised over whether the problem will be compounded with the SGX's quest to add more liquidity by wanting to lure high-frequency traders into its fold - by offering them rebates on the fees it charges for clearing their trades.

High-frequency traders, or algos, are sophisticated investors who use high-speed computers to try to make money from tiny changes in prices by simultaneously entering and cancelling a large number of orders.

Trying to ban high-speed trading may be as futile as King Canute ordering the tides to turn back. But before the SGX presses forward, some contradictions need to be ironed out.

How, for example, is it going to explain why it is okay for algos to repeatedly enter orders and withdraw them quickly and not face any sanctions, when individual brokers who do the same may be questioned or even punished?

As many algos reside outside Singapore, what redress is available if charges of shares manipulation are levelled against them?

Surely, our unhappy experience with unscrupulous S-chip bosses and predatory short-sellers should have taught us a lesson or two about naively trusting them to do the right thing and abide by our rules.

There is also the question of what this will mean to the retail broker as the latest changes proposed by the SGX sweep the market.

As it is, offering free credit is a high-risk, low-return job hazard because brokers are fully accountable for all the losses not paid by their clients.

With the advent of high-speed trading, that risk may become untenable.

Reader Geoffrey Kung noted that it is only by thinking out of the box that a quantum leap can be achieved in solving the problems shackling our market.

He wrote: "It is time the SGX planned for better systems rather than spend money on purchasing faster engines. In the information technology trade, there is a saying: If the system is bad, a faster machine will only accentuate the faults."

engyeow@sph.com.sg


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