A cautionary tale of using red flags?

A cautionary tale of using red flags

Wednesday, Mar 26, 2014

Goh Eng Yeow

The Straits Times

SINGAPORE – First, the Singapore Exchange (SGX) was accused of doing too little. Now, it is accused of doing too much.

The bourse operator faces an uphill task in pleasing both listed companies and investors in upholding the standards of corporate disclosure.

It is one of the few stock exchanges in the world to make a point of asking listed firms for an explanation if their share prices or trading volumes are out of the ordinary. This is to enable investors to make informed decisions on their investments.

But some stock pundits have long felt the SGX could do more when a company issues the standard catch-all reply that it is unaware of information that could have led to the unusual trading.

So from this month, the SGX decided to up the ante. Following a joint review with the Monetary Authority of Singapore (MAS), the SGX said it would issue a “trade with caution” notification to remind investors to be careful if a company fails to come up with a satisfactory explanation when queried.

“This will serve as a warning that the trading activities in that company’s stock could be caused by market forces other than the corporate developments of the company,” it added.

Now, making money on the stock market is never a sure thing, so trading with caution is what investors ought to be doing all the time, even if the SGX does not remind them to do so.

Viewed in this light, the SGX’s “trade with caution” reminder should not be construed as a red card, yellow card or “black mark” against the affected company.

But that is not how the investing public perceives this latest move, no matter how well-intentioned the SGX’s original motives.

Indeed, going by the drop in prices encountered by counters that had been slapped with the “trade with caution” label, the market views the SGX’s signal as a “sell” call on the stock.

Then there is the gripe that the SGX might have been too liberal in sticking the “trade with caution” label on companies, even those offering plausible reasons for their unusual trading pattern.

Examples include Jardine Cycle & Carriage, which said its rally might have been caused by favourable developments in Indonesia that gave a big boost to its unit Astra International, and TT International, which just announced the successful completion and launch of its long-delayed warehouse project.

These concerns have led to fears that the SGX’s campaign is turning into regulatory overkill. Stock activist Denis Distant said: “SGX should not be too quick on the draw in issuing the ‘trade with caution’ alerts or (it risks) the SGX trading board becoming a minefield.”

Some also complain that they are baffled by the criteria used by the SGX in deciding whether it should query a company.

Last week alone, the SGX queried seven companies and slapped the “trade with caution” label on six. In contrast, there were only a total of 28 queries in the 10 weeks before that.

So how is the SGX supposed to assuage this tide of unhappiness? To be fair to the SGX, it has gone the extra mile in trying to get listed firms to be more forthcoming in providing material information in a timely manner to investors.

In many other markets, it is caveat emptor, or buyer beware, as investors are left to fend for themselves. But having said that, there is a case to be made about using the “trade with caution” label a lot more sparingly – dare I say cautiously – than is the case now, even though the SGX views it as an extension of its public query process.

After all, every student would have read the Aesop’s Fable about the shepherd boy who cried wolf frequently.

Over time, the villagers stopped believing him and failed to help when a wolf was actually stalking his flock.

In this context, it is worth recounting the calamitous plunge of the penny stock trio – Blumont Group, Asiasons Capital and LionGold Corp – last October.

When the SGX allowed them to resume normal trading two weeks after suspending contra trades, it inserted a clause to “trade with caution” in its announcement to warn investors to be careful.

But traders had become used to seeing the same clause in other SGX announcements, so the warning was largely ignored.

And “blind” to the clause, some traders inferred – quite erroneously as it turned out – that there was nothing amiss with the trio since regulators had the previous fortnight to probe any wrongdoings that might have transpired.

These traders then complained that they were misinformed when they suffered huge losses, after the MAS said that there was an “extensive review” on trading activities around the three counters.

It is a cautionary tale about red flags losing their effectiveness if they are used too frequently. Still, red flag or not, investors are ultimately responsible for whatever actions they take on their investments. The money is theirs to lose.