Wednesday 30 October 2013

How to prevent another penny stock fiasco

The recent fiasco involving three local stocks wiped billions off investors’ portfolios. More seriously, it exposed major structural problems in Singapore’s stock trading processes, which should be addressed to prevent the episode from repeating itself.
By Jonathan Kwok, The Straits Times, 29 Oct 2013

AT THE start of this year, three locally listed companies - Blumont Group, Asiasons Capital and LionGold Corp - were worth a combined $2.34 billion.

By Tuesday, Oct 1, the trio's combined value had skyrocketed to $10.53 billion on the back of corporate acquisitions and a surge in interest in penny stocks, among other things.

But on Friday that week, the trio's ascent abruptly reversed. The shares took a massive dive, losing about $5 billion in market value in their first hour of trading before the Singapore Exchange (SGX) stepped in with a rare directive to suspend trading.

Trading soon resumed, though for a period the SGX slapped trading restrictions on the three counters.

They experienced a temporary fillip when the SGX lifted the restrictions but quickly reversed course on news that the Monetary Authority of Singapore (MAS) and the SGX were reviewing their trading activities. Last Friday, the combined market value of the three companies was only $842 million.

With restrictions now lifted and the financial damage done, the soul-searching has begun, not least because of the possible reputational damage to the bourse.

The MAS last week admitted that the episode ''surfaced broader issues regarding the market structure and practices'', which it will review with the SGX.

Some have questioned if the SGX could have acted earlier and more effectively when the three stocks were rising rapidly - and, market watchers say, beyond reasonable valuations.

The exchange issues public queries when a firm's shares move dramatically - as it did with the beleaguered trio - and it says these are signals to investors. But such queries are often ignored.

The next tools on hand are the SGX's tough measures of suspension and trading curbs, which kicked in only as the shares were collapsing. Before this, the last time such curbs were imposed was in 2008.

Calls have also been renewed for ''circuit breakers'', which will automatically halt trade if a stock's price fluctuates violently.

There were complaints about the confusion over how the curbs should be interpreted and the fact that investors had to wait four days to sell the shares even after paying cash for them upfront. There were questions on whether insider trades in one of the stocks were disclosed in time.

Contra system

BUT one of the most fundamental issues that needs to be looked at is the archaic ''contra'' system for stock trading, which exists only in Singapore and Malaysia.

Investors here have up to three days to pay for their shares after buying them. During this time traders can decide to resell the shares they have just bought, and pocket or pay up just the difference rather than the full amount of their purchases.

Such practices have been around since 1930, when the predecessor of the Singapore and Malaysian bourses was established.

Brokers in those early days were comfortable extending credit to clients. The investing community was small, and they knew their clients well. Eventually the system became institutionalised.

In the latest saga, contra trading allowed punters to push the three penny stocks to astronomical levels without any cash upfront, prompting criticisms that the system encourages short-term punts, and has no place in a developed financial system.

''Contra does not encourage investing; it encourages gambling,'' said Mr David Gerald, president and chief executive of the Securities Investors Association (Singapore), the main retail investor lobby group. ''It encourages people to have a short-term view.''

But contra trading has its defenders. They claim that Singapore's market is too small and must allow for contra to provide liquidity. Forcing full, upfront payments would likely reduce the volume of trades. Many traders still like to do short-term punts without putting cash upfront.

''To blame the woes solely on contra trading defies logic,'' said the Securities Association of Singapore (SAS), which represents brokerages serving retail investors. It noted that there are other forms of trading that rely on borrowed funds.

Mr Jimmy Ho, president of the Society of Remisiers (Singapore), argued in The Straits Times Forum that contra plays provide liquidity that is key during quiet periods when foreign funds are absent: ''It is dangerous to take international practices (for example, disallowing contra plays) as the standard for determining the correct structure of our exchange.''

Nonetheless, a strong case can be made for the use of contra to at least be reduced. The alternative of ''cash trading'' - where investors must pay upfront when they buy stocks - would limit the risk exposure of brokerage firms and their remisiers, who take on the credit risk during contra trading.

Despite cash trading being the norm in most markets, few brokers here offer it; Standard Chartered, Citibank and DBS Vickers are notable exceptions. The majority offer only contra trading.

Broking firms should offer both options. It will be win-win for all parties: cash trading involves lower commissions due to lower risks, so long-term investors can save on their costs. And the brokers will reduce their risks.

CPF Investment Scheme

THE second key area that needs review involves the Central Provident Fund Investment Scheme, which allows Singaporeans to invest their CPF monies - meant for retirement - in financial instruments, including shares.

Asiasons and Blumont are approved CPF investments, so some investors may have lost a part of their nest eggs recently.

In response to Business Times commentaries on this issue, the CPF Board said that no amount of tighter qualifying criteria can guarantee individual stocks will not run afoul of regulatory, accounting or governance standards.

It advised members to invest in funds, rather than individual stocks, to lower their risks - or to leave their cash savings untouched to earn CPF's guaranteed interest if they are risk-averse.

The CPF Board said some members will wish to invest directly in shares, so it is allowing this with ''limits and safeguards''. Its website says people can use up to only 35 per cent of their CPF investible savings for shares.

That is likely to cut little ice with Singaporeans who - rightly or wrongly - may assume that investments approved by CPF have been screened by the board and have a degree of legitimacy.

''When CPF (Board) puts a stock on the list, the man in the street may have the perception that somebody has done the due diligence,'' said Singapore Management University's associate professor Jeremy Goh, who researches corporate governance.

It would be draconian for the CPF Board to disallow investments in individual shares altogether. But the current criteria are arguably too lax.

To be on the scheme, the shares need only be listed on the SGX mainboard, traded in Singapore dollars as well as belong to a company incorporated in Singapore and allowing CPF investors to attend meetings. There are no profitability or size requirements. One option is to restrict the investable stocks to larger companies, such as the blue-chips in the Straits Times Index.

Professor Goh suggested the CPF Board consider using some kind of corporate governance measure as a screening tool: ''You cannot stop fraud, but to mitigate the risk they may want to consider measures, like the quality of the board.''

Ultimate responsibility

WHILE systems need to be improved, it is important to note that ultimately investment decisions - and risks - fall on investors. This is only fair, as they pocket the upside if the stocks make gains.

The mantra of the market is ''caveat emptor'' - or ''buyer beware'' - and the onus is on individuals to manage their own risks.

But many investors here listen to third-party views rather than do their homework and make their own informed decisions, said Mr Gerald. ''We have more speculators than investors.''

With each stock market disaster, one hopes that Singapore investors are learning lessons - albeit painful ones- about doing their homework before investing.

Penny stock drama likely to hold traders' attention
Many investors unhappy with how fiasco is being handled
By Goh Eng Yeow, The Straits Times, 28 Oct 2013

THE sharp and, occasionally, violent gyration in the share prices of Asiasons Capital, Blumont Group and LionGold Corp is likely to keep traders glued to their screens this week.

Last Friday, all three counters plunged by almost one-fifth each, on news that the Monetary Authority of Singapore (MAS) and Singapore Exchange (SGX) were conducting an extensive review into their trading activities.

Before this, the shares had staged a spectacular recovery - almost doubling in value - after the SGX lifted a ban on contra trading and short-selling on the trio. The exchange had imposed trading curbs on these counters a fortnight earlier when their shares suddenly plunged in price.

For many traders, the wild swing from exuberance back to despair last week may just be too much to handle.

While the SGX had cautioned shareholders and investors to "trade with caution" when it removed the trading curbs, some investors interpreted the lifting of the ban as an all-clear signal and rushed headlong back into the counters again.

But this generated disquiet among the more discerning investors, who want a probe into the cause behind the spectacular crash which has resulted in over $8 billion of stock value being wiped out in a matter of days.

The MAS' comments appear to be the first confirmation that the authorities are not laying the matter to rest, and that they are investigating the circumstances surrounding the meteoric rise of the three counters in the past year and their subsequent rout four weeks ago.

As one reader put it: "Until such an investigation commences, I shall look back with horror that $8 billion can be wiped out just like that in a small stock market like Singapore."

Although the regulators are doing their best to ensure that justice is served, there are many disgruntled investors who are unhappy with the way in which the latest penny stock fiasco is being handled.

One reader, who identified himself as Eugene, wrote: "Why the disclosure now? The regulators had two weeks when the counters were designated to give an indication that they would pursue the case further.

"Now, investors like myself have put money into them (LionGold in my case), believing in good faith that the regulators have restored a normal trading environment, and we find ourselves being hit..."

The fiasco involving the three counters had also led to criticism earlier as to whether the SGX had acted too late to dampen the fervour of retail investors as they were caught up in the heady run-up of the three counters.

This was despite the slew of queries which it had sent out to all the three companies to explain the run-up in their shares, including an unusually detailed one to Blumont just a few days before its share price crashed.

While broking houses' operations and financials remain sound, according to the MAS, this does not mean that everything has returned to normal as far as the three counters are concerned.

The Securities Association of Singapore, which represents broking houses serving retail investors, has noted that a big portion of the trading losses might be residing in the margin accounts opened by traders with private banks who had pledged shares of the three counters as collateral for loans.

In the weeks ahead, these banks may try to recoup some of their losses by force-selling the collateralised shares.

Indeed, this is already happening at Blumont, where insiders have been forced by the banks to sell their shares.

Does regulator need regulation?

THE actions of Singapore Exchange (SGX), the market regulator, over the past three weeks have left many questions unanswered ("Penny stock drama likely to hold traders' attention"; Monday).

Why did it not take action when the prices of three locally listed companies - Blumont Group, Asiasons Capital and LionGold Corp - rose spectacularly? And why did it eventually decide to act and raise queries?

Did its actions cause market panic, leading to the crash of these stocks? And why was the possibility of further probes announced only after the stocks resumed trading after their suspensions were lifted?

Billions of dollars have been wiped out in a flash. Hasn't the SGX learnt its lesson from the financial crisis in 2008 - that is, if you take your eye off the ball, there can be disastrous consequences?

More importantly, does the regulator need regulation?

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.

The last thing Singapore needs is a reputation for poor market regulation.

Samuel Owen
ST Forum, 30 Oct 2013

Do more to protect investors from stock market crashes

WHEN three stock counters - Asiasons Capital, Blumont Group, and LionGold Corp - crashed suddenly over two days of trading a couple of weeks ago, their values plummeted by up to 90 per cent from between $1.40 and $2.80.

The loss in share value was estimated at a whopping $8 billion.

This has to be the biggest loss on the Singapore Stock Exchange (SGX) in recent history involving so few counters in such a short period of time.

Companies and individuals who held these three counters were badly burnt.

One of my neighbours, a retired professional, lost over $200,000.

Many broking houses are saddled with huge debts and one hears of remisiers and clients going into hiding.

There have been all sorts of speculation as to what caused this financial disaster.

Unless one hopes to keep the shares over the long term, few bother to study fundamentals before buying them.

Investors bought the three counters on market sentiment in the hope of making a quick profit, a normal trading behaviour in stock markets worldwide.

If investors must always look at price-earnings ratios before buying shares, then Internet search engine Google's US$1,000 (S$1,200) share price and mail-order house Amazon's US$334 a share make no sense whatsoever when compared with the US$24 a share of Intel USA, which has multi-billion-dollar assets worldwide.

The curbing of trading by broking houses and a bank's forced-selling of Blumont shares only fuelled more rumours and spooked the market into dumping the three counters.

This episode shows that our share trading system lacks the robust safeguards to protect investors.

How else can $8 billion of investors' money be so easily and swiftly wiped out?

It calls for a thorough investigation into who and what caused the crash, and for the perpetrators to be brought to book.

Chan Chew Guan
ST Forum, 26 Oct 2013

Blame greed, not the 'lifeguard'

STOCK market regulators have the dual role of regulating the marketplace as well as promoting policies that aim to ensure the health and integrity of the bourse ("Do more to protect investors from stock market crashes" by Mr Chan Chew Guan; last Saturday).

Beyond ensuring that financial shenanigans are not perpetrated on the unsuspecting, regulators cannot be expected to force big-time investors to reveal their strategies, nor prevent those unfamiliar with the treacherous ways of the market from losing the shirts off their backs.

Stock markets are capitalistic oceans, much of which are utterly dangerous for dilettantes to negotiate. It is unfortunate that, caught in the frenzy of blood-letting that their inexperience and fecklessness led them into, investors asked why a lifeguard was not on duty. This misses the point.

It has been only a few months since the gold trading fiasco ("180 investors ink petition, urge action on gold trader"; March 7). Then as now, losers did not acknowledge avarice as the reason for their losses but instead blamed the financial regulators.

How many times do investors need to be reminded that the best protection against deceit, fraud and herd instinct is a healthy dose of cynicism backed by spadefuls of hard research and due diligence?

Yik Keng Yeong (Dr)
ST Forum, 30 Oct 2013

Why SGX suspends, designates and investigates

THE Singapore Exchange (SGX) has been asked about the differences in regulatory actions taken in the case of Sky One Holdings and in the case of Asiasons Capital, Blumont Group and LionGold Corp.

Not all sharp price movements warrant a suspension of the stock. Each occurrence has to be evaluated on its own merit in the context of circumstances of the case.

In the case of Sky One, the SGX's review of the circumstances revealed no threat to fair, orderly and transparent trading. Hence, no suspension occurred.

In the case of Blumont, Asiasons and LionGold, our review showed disorderliness in the market and lack of transparency that could also threaten the fairness of trading.

The same principle applies to the designation of stocks.

Each case is evaluated in the context of its own circumstances.

In the case of Sky One, designation was not necessary. But for Blumont, Asiasons and LionGold, designation was instituted to remove the froth of excessive speculation in the market and permit the fundamentals to assert themselves in determining market prices.

Both suspension and designation are measures that help to return the market to finding its own equilibrium.

For Blumont, Asiasons and LionGold, after the end of designation, the forces of supply and demand have reasserted themselves to determine the prices of the stocks. Normal trading conditions have resumed.

Investigation of market misconduct is separate and distinct from regulatory tools the SGX deploys to bring about fair, orderly and transparent trading in the market. It can be initiated by market activities observed during surveillance.

We understand the public wanting to know more about such investigations, but releasing information prematurely could jeopardise the integrity of the probe.

Furthermore, investigation into the trading of a particular security does not equate to the presence of wrongdoing. Nor does every investigation lead to conviction.

It would be unfair if the public announcement of an investigation tarnishes the reputation of the stock or of any individual investor.

Where market misconduct reflects possible breaches of the Securities and Futures Act, findings are referred to the relevant authorities that can exercise their statutory powers.

Readers may also want to refer to our regulatory announcement last Friday, "SGX corrects misconceptions", available on our website.

Richard Teng
Deputy Chief Regulatory Officer


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