Daily volume falls to lowest levels in 3 weeks; some call SGX move drastic
By Goh Eng Yeow 24 September 2008
AN uneasy hush descended upon the stock market yesterday, after the Singapore Exchange (SGX) imposed stiff penalties for ‘naked’ short-selling of shares.
The daily traded volume fell to 870.1 million shares - its lowest levels in three weeks - after some remisiers asked clients to indemnify them for any trading mistakes that might be incurred on their ‘sell’ orders.
‘Naked’ short-selling occurs when a trader sells a stock he does not own, or has not borrowed, in the hope that the price falls. He then pockets the difference.
Such a practice results in a ‘failed’ order, forcing the SGX to create a special ‘buying-in’ market just to buy shares on behalf of these short-sellers so that the trade can be settled.
Traders have welcomed the SGX’s move to make such purchases more transparent by publishing a list of stocks, subject to buying-in, half an hour before the buying is carried out at 11.30am each day.
The SGX is also imposing a penalty of $1,000 or more for each failed trade executed from tomorrow but traders have attacked this as too drastic.
But the SGX told The Straits Times by e-mail that the ‘penalty should be large enough as an effective deterrent against undesirable conduct’.
‘All penalties/monies collected do not go into SGX’s revenue. The amount is earmarked for investor education activities,’ it added.
But some traders queried the need for such a pre-emptive measure, as the huge short-selling that brought some financial giants to their knees in the United States and Britain had not been seen here.
Indeed, buying-in of shares on Monday amounted to only $7.4 million. This was a fraction of the $1.65 billion of shares traded on Tuesday last week - the day when the failed orders occurred.
Yesterday, the buying-in of shares was scarcer still. The biggest orders were for 341,000 Golden Agri Resources shares and 101,000 Synear Food shares. These together would have cost the short-sellers only about $170,000.
‘If trading is as orderly and settlement as timely as what the SGX had claimed in its directive, why is there a need for such a harsh punishment,’ asked remisier James Tan.
To limit his exposure, he told clients that he would only sell shares that he had bought on their behalf, unless he is indemnified on possible losses.
One stockbroking director suggested that provisions should be made for traders who make genuine mistakes.
‘Just look at the list of buying-in securities. Other than Golden Agri Resources and China Hongxin, there is hardly any big scale short-selling at all,’ he said.
And punishing a trader with a fine of $1,000 for getting caught short on 246 Bio-Treat shares worth $34.44 or 147 China Hongxin shares costing $47.04 seems ‘rather excessive’.
‘You are signalling to people that you should either trade with 100 per cent accuracy, or don’t be in the market at all,’ he observed.
In any case, the curbs will not slam the brakes on the abusive short-selling that had given China plays and other vulnerable stocks much grief as the market went into free-fall in recent weeks.
‘Measures should be taken over the day-traders who deliberately short-sell the stock, then spread rumours about it and cover back their positions before trading closes,’ he added.
Still, there are some who believe that tougher measures should be taken against naked short-sellers, though not in the manner unveiled by the SGX.
Mr Kevin Scully, executive chairman of NetResearch Asia, noted that given the highly volatile market, there is a chance that a trader might make a profit if a stock falls steeply on the day when the failed trade is subject to buying-in by the SGX.
‘The pain to the short-seller should be a prohibitive buying-in price, rather than an outright fine for a failed trade,’ he suggested.
And some traders believe that the SGX should have implemented a more comprehensive scrip-lending programme than the one operated by the Central Depository (CDP) where borrowers are confined to banks and brokerages.
‘When a trader makes a mistake in selling, there is literally no recourse, except to wait for the buying-in market. He can’t go to CDP directly to borrow scripts,’ said a dealer.
Concerns that SGX may suffer a drop in turnover, as the fear of penalty sinks in, are already causing some jitters among investors.
SGX fell 28 cents, or 4.2 per cent, to $6.45 yesterday, and lost about $299 million of its market value.
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Traders Jumpy over Penalties
Daily volume falls to lowest levels in 3 weeks; some call SGX move drastic
By Goh Eng Yeow
24 September 2008
AN uneasy hush descended upon the stock market yesterday, after the Singapore Exchange (SGX) imposed stiff penalties for ‘naked’ short-selling of shares.
The daily traded volume fell to 870.1 million shares - its lowest levels in three weeks - after some remisiers asked clients to indemnify them for any trading mistakes that might be incurred on their ‘sell’ orders.
‘Naked’ short-selling occurs when a trader sells a stock he does not own, or has not borrowed, in the hope that the price falls. He then pockets the difference.
Such a practice results in a ‘failed’ order, forcing the SGX to create a special ‘buying-in’ market just to buy shares on behalf of these short-sellers so that the trade can be settled.
Traders have welcomed the SGX’s move to make such purchases more transparent by publishing a list of stocks, subject to buying-in, half an hour before the buying is carried out at 11.30am each day.
The SGX is also imposing a penalty of $1,000 or more for each failed trade executed from tomorrow but traders have attacked this as too drastic.
But the SGX told The Straits Times by e-mail that the ‘penalty should be large enough as an effective deterrent against undesirable conduct’.
‘All penalties/monies collected do not go into SGX’s revenue. The amount is earmarked for investor education activities,’ it added.
But some traders queried the need for such a pre-emptive measure, as the huge short-selling that brought some financial giants to their knees in the United States and Britain had not been seen here.
Indeed, buying-in of shares on Monday amounted to only $7.4 million. This was a fraction of the $1.65 billion of shares traded on Tuesday last week - the day when the failed orders occurred.
Yesterday, the buying-in of shares was scarcer still. The biggest orders were for 341,000 Golden Agri Resources shares and 101,000 Synear Food shares. These together would have cost the short-sellers only about $170,000.
‘If trading is as orderly and settlement as timely as what the SGX had claimed in its directive, why is there a need for such a harsh punishment,’ asked remisier James Tan.
To limit his exposure, he told clients that he would only sell shares that he had bought on their behalf, unless he is indemnified on possible losses.
One stockbroking director suggested that provisions should be made for traders who make genuine mistakes.
‘Just look at the list of buying-in securities. Other than Golden Agri Resources and China Hongxin, there is hardly any big scale short-selling at all,’ he said.
And punishing a trader with a fine of $1,000 for getting caught short on 246 Bio-Treat shares worth $34.44 or 147 China Hongxin shares costing $47.04 seems ‘rather excessive’.
‘You are signalling to people that you should either trade with 100 per cent accuracy, or don’t be in the market at all,’ he observed.
In any case, the curbs will not slam the brakes on the abusive short-selling that had given China plays and other vulnerable stocks much grief as the market went into free-fall in recent weeks.
‘Measures should be taken over the day-traders who deliberately short-sell the stock, then spread rumours about it and cover back their positions before trading closes,’ he added.
Still, there are some who believe that tougher measures should be taken against naked short-sellers, though not in the manner unveiled by the SGX.
Mr Kevin Scully, executive chairman of NetResearch Asia, noted that given the highly volatile market, there is a chance that a trader might make a profit if a stock falls steeply on the day when the failed trade is subject to buying-in by the SGX.
‘The pain to the short-seller should be a prohibitive buying-in price, rather than an outright fine for a failed trade,’ he suggested.
And some traders believe that the SGX should have implemented a more comprehensive scrip-lending programme than the one operated by the Central Depository (CDP) where borrowers are confined to banks and brokerages.
‘When a trader makes a mistake in selling, there is literally no recourse, except to wait for the buying-in market. He can’t go to CDP directly to borrow scripts,’ said a dealer.
Concerns that SGX may suffer a drop in turnover, as the fear of penalty sinks in, are already causing some jitters among investors.
SGX fell 28 cents, or 4.2 per cent, to $6.45 yesterday, and lost about $299 million of its market value.
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