Clarifying SGX’s clarification on the “penny” stock scandal in Singapore

Clarifying SGX’s clarification

Friday, Nov 01, 2013

R Sivanithy

The Business Times

In response to the tumultuous events of the past three weeks involving the speculative trio of stocks Asiasons, Blumont and LionGold, the Singapore Exchange (SGX) last Friday issued a detailed clarification to correct what it believes are misconceptions about its role as frontline market regulator. Clearly intended to be the final word on the subject, SGX’s explanations are useful as they address gaps in the public’s understanding of the way regulatory matters are handled and how the exchange views its role. Last Friday’s release should be compulsory reading for all parties interested in regulatory matters, how discipline is maintained in daily trading, and overall governance.From a close reading of SGX’s release, the first point to note is that the exchange’s powers are limited almost wholly to issuing warning signals to the market if trading takes an unusual turn. These warnings range in strength, starting with a query – the first signal that something may be amiss. Then it progresses to designation (which occurs if there may be possible manipulation and/or excessive speculation); and ends with an exchange-driven suspension (when the exchange thinks the market is not orderly, informed or fair).

A temporary suspension could, of course, come ahead of designation as shown in the case of the speculative trio. But the point that should be stressed is that SGX’s primary regulatory role in daily trading – apart from enforcing its listing rules – is to sound warnings.

The second point is that once signalling has progressed to a suspension, the market is then assumed to be fully warned. In this context, “warned” may be equated with “informed”, and a lifting of the suspension should not be seen as an automatic all-clear that everything is above board.

In fact, the very opposite may hold true because SGX took pains to emphasise that its three signalling tools are completely divorced from any behind-the-scenes investigations that might be simultaneously undertaken into insider trading and market manipulation, and that such investigations can be ongoing without trading being suspended.

The official stance is therefore that if SGX has progressively raised its warning level from a query to a designation or a suspension and then lifts the trading curbs, traders and punters should approach the stocks in question with extreme caution as investigations could be in progress. According to SGX, this is in line with global practice, the logic being that if everyone has been warned, then orderly trading is possible – even if the market does not know whether there are investigations underway.

Fair enough; after all, the exchange is in the business of operating a marketplace by bringing buyers and sellers together, and that has to be a priority. However, there were traders who jumped into the three stocks last week after their designations were lifted only to be told a few days later that investigations were on – information which promptly led to all three collapsing.

It would have been much better if the market had been told of continuing investigations before the designation was lifted or if Friday’s clarification was issued before normal trading in the three stocks resumed. That way, punters would have been under no illusions that a lifting of an SGX-initiated designation meant all was well.

Timing issues aside though, there remains one grey area which hasn’t been resolved: SGX’s Friday declaration that it does not specify contra trading since this is wholly the purview of individual broking houses.

This, of course, makes sense as it is brokerages and their dealing staff who bear the risks of contra trading. So it is probably wise to leave it to brokers to decide whether to allow such trading or not.

However, when the exchange classified the trio as designated securities earlier this month, reports from brokers were that they were told by the exchange not to allow contra trading, even for clients who had already paid upfront. This caused tremendous confusion and unhappiness among dealers and their customers – quite naturally, because money was lost.

There’s therefore a contradiction here which should be cleared as soon as possible. Does SGX designation mean contra trading is automatically suspended? Or is it only prohibited by the exchange in certain special cases? If so, what are the circumstances under which the exchange can stop contra trading, given that it has said it does not interfere with such trading?