Friday 26 September 2008

Dealers petition against short-sell penalties

They say that SGX move is too harsh on honest mistakes
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Guanyu said...

Dealers petition against short-sell penalties

They say that SGX move is too harsh on honest mistakes

By LYNETTE KHOO

(SINGAPORE) The penalties imposed by the Singapore Exchange (SGX) on naked shorts took effect yesterday but some brokers are already up in arms, voicing their unhappiness and seeking a policy reversal.

Close to 130 dealers at Kim Eng signed a petition and submitted it to their management yesterday, urging an appeal to SGX. When contacted, SGX said that it has received various feedback from market participants and is in communication with member firms and the Securities Association of Singapore (SAS).

One dealer described the measures as ‘using an atomic bomb to kill an ant’. Another called it counterproductive.

Trading representatives (TRs) across brokerages have taken up the issue with SAS, which has informed SGX of the concerns raised by the TRs. But SGX is said to have rejected the appeal.

Confirming this, Kim Eng executive director Ong Seng Gee told BT: ‘All the various broking firms came together, discussed it and arranged a meeting with SGX.’ But he was informed that SGX is sticking to its stand until a review comes up in a month’s time.

Amid widespread bans on naked short-selling elsewhere, SGX decided to crack the whip this week with penalties for failed trades and cumulative short-selling.

A naked short that is not covered before the buying-in process by SGX three days from the transaction date (T+3) constitutes a failed trade. SGX is imposing a penalty of 5 per cent of the value of the failed trade, subject to a minimum of $1,000, on top of the current processing fee for buying-in at $30 per contract.

To deter cumulative short-selling by brokers, SGX may also punish the failure to deliver shares in the buying-in market with a penalty of $50,000 and/or disbarment from participating in the buying-in market.

The sticking point in this move is that it subjects a genuine mistake to the same penalty as an intentional naked short. Dealers said that they consider that a blunt tool to punish naked shorting.

Apparently, honest mistakes resulting in naked shorts is common in Internet trading - such as the wrong number of shares or the wrong company code getting keyed in. In some cases, a client may sell more shares than he thought he owned after a share consolidation by the company that issued the shares.

These could hit retail investors hard as well as the TRs who indemnify the risk of the penalties for their clients, Mr Ong said.

A dealing director with a local brokerage said that he is concerned that penalising genuine mistakes would reduce trading transactions as people become afraid to trade. There are others who question the need to impose such hefty penalties that are eventually channelled to SGX’s investor education initiatives.

Under the new measures on short-selling, SGX discloses the list of buying-in securities and volume of shares sought, as well as the list of securities bought-in with their quantities and dollar-values every morning. The number of contracts for naked shorts are not disclosed.

Brokers who spoke to BT felt that the exchange should be addressing covered short-selling on borrowed scrips instead.

‘Short-selling is the effect, not the cause of the financial crisis. By taking on short-sellers, it is taking liquidity off the market,’ said a stock analyst. Perhaps a better way is to disclose short-selling on borrowed scrips - akin what is done on Hong Kong exchange, he added.