Most naked short-selling here due to carelessness rather than trading abuse
By Goh Eng Yeow 28 September 2009
It has been one year since the Singapore Exchange (SGX) imposed stiff fines on the ‘naked short-selling’ of shares.
But right from the day when it introduced such a draconian penalty, traders have been against the move.
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 when he buys the stock to deliver on the sale.
Under normal circumstances, such speculative trading accounts for only a small fraction of the total transactions on the stock market each day.
But last year’s circumstances were far from normal.
When the SGX made its decision to impose the penalties, the global financial system was under siege after US investment bank Lehman Brothers collapsed. Rampant naked short-selling on Wall Street amid diving stock prices had threatened to pull down other banking giants such as Morgan Stanley as well.
And the SGX justified its move by explaining that the ‘penalty should be large enough as an effective deterrent against undesirable conduct’. Some other bourses banned naked short-selling altogether.
But as traders observed then, such abusive trading practices had not occurred here and this made SGX’s pre-emptive measure unnecessary.
Surely, there is no need to use a sledge hammer approach to tackle a fairly innocuous problem, they argue.
As it turns out, rather than catching errant traders out to ‘short’ a stock and cause its share price to plunge, SGX’s penalty has instead ensnared dealers who make ‘fat finger’ errors like typing in the wrong number of shares to be sold.
For their negligence, they are now slapped with a fine of $1,000 or more by the SGX when they fail to deliver the shares to the buyer on settlement date.
The SGX’s own daily list of the stocks that it has to buy on behalf of traders failing to deliver shares to the buyers - known in the trade as ‘buying-in’ - is itself testimony that most of the naked short-selling here is caused by carelessness, rather than anything else.
Take last Friday’s list: A quick run-through shows 1,000 DBS Group Holdings shares and 999 Keppel Land shares being ‘bought in’ by the SGX.
While such carelessness is deplorable, it is hardly the type of undesirable conduct that warrants a hefty penalty. It does not fit into the pattern of abusive short-selling on Wall Street last year where traders would sell shares in large quantities in the hope that its price would plunge.
It also leads to sometimes absurd situations where the $1,000 fine imposed by the SGX is more than the cost of the shares to be paid by the trader who had made the short-selling error.
Surely, in the light of the different experience here, it is time for the SGX to review the stiff penalties introduced last year to see if they are still justified.
Isn’t it better for the SGX to impose an administrative charge on a trader for making a ‘fat finger’ error, rather than slapping a hefty fine of $1,000 on him?
At the very least, this will save the SGX the considerable time and paperwork involved in going through the many appeals made by traders against the fines imposed on them.
And collecting such huge penalties brings with it other problems - public scrutiny of how much fines are being collected and how the money is being used.
When the fines were imposed last year, the SGX told The Straits Times that ‘all penalties/monies collected do not go into the SGX’s revenue’. Instead, the amount would be earmarked for investor education activities.
The SGX’s latest annual report confirms that an investor education fund had been set up to ‘support initiatives that seek to improve the understanding of investors and their ability to make better informed investment decisions’.
Money for the fund had come from collection of fines imposed for breaches of SGX rules.
But the annual report apparently fails to shed light on the sum of money collected in the form of fines between October last year and June this year - a period which formed part of the SGX’s financial year ended June 30.
A back-of-the-envelope calculation shows that this sum might be considerable.
Take last Friday’s SGX buying-in list, which saw 16 counters ‘bought’ by SGX on behalf of short-sellers. Assuming each short-seller pays the SGX a fine of $1,000 for the breach, this would work out to a payment of $16,000.
Spread over a period of one year, the total sum collected by the SGX may work out to be as high as $4 million. Of course, the sum which the SGX has collected may be much smaller, as it could have waived the fines for the many who had appealed.
But rather than having a guessing game, it would be far better for the SGX to be fully transparent on the quantum of fines collected, and to give a breakdown on how the money is being spent.
That will also remove any lingering concerns that any of this money may become accidentally mixed with the profits it makes from its core business of earning a fee from clearing trades transacted on the local bourse.
After all, transparency is meant to be a watchword for all listed companies under its purview.
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Time for SGX to review short-selling penalties
Most naked short-selling here due to carelessness rather than trading abuse
By Goh Eng Yeow
28 September 2009
It has been one year since the Singapore Exchange (SGX) imposed stiff fines on the ‘naked short-selling’ of shares.
But right from the day when it introduced such a draconian penalty, traders have been against the move.
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 when he buys the stock to deliver on the sale.
Under normal circumstances, such speculative trading accounts for only a small fraction of the total transactions on the stock market each day.
But last year’s circumstances were far from normal.
When the SGX made its decision to impose the penalties, the global financial system was under siege after US investment bank Lehman Brothers collapsed. Rampant naked short-selling on Wall Street amid diving stock prices had threatened to pull down other banking giants such as Morgan Stanley as well.
And the SGX justified its move by explaining that the ‘penalty should be large enough as an effective deterrent against undesirable conduct’. Some other bourses banned naked short-selling altogether.
But as traders observed then, such abusive trading practices had not occurred here and this made SGX’s pre-emptive measure unnecessary.
Surely, there is no need to use a sledge hammer approach to tackle a fairly innocuous problem, they argue.
As it turns out, rather than catching errant traders out to ‘short’ a stock and cause its share price to plunge, SGX’s penalty has instead ensnared dealers who make ‘fat finger’ errors like typing in the wrong number of shares to be sold.
For their negligence, they are now slapped with a fine of $1,000 or more by the SGX when they fail to deliver the shares to the buyer on settlement date.
The SGX’s own daily list of the stocks that it has to buy on behalf of traders failing to deliver shares to the buyers - known in the trade as ‘buying-in’ - is itself testimony that most of the naked short-selling here is caused by carelessness, rather than anything else.
Take last Friday’s list: A quick run-through shows 1,000 DBS Group Holdings shares and 999 Keppel Land shares being ‘bought in’ by the SGX.
While such carelessness is deplorable, it is hardly the type of undesirable conduct that warrants a hefty penalty. It does not fit into the pattern of abusive short-selling on Wall Street last year where traders would sell shares in large quantities in the hope that its price would plunge.
It also leads to sometimes absurd situations where the $1,000 fine imposed by the SGX is more than the cost of the shares to be paid by the trader who had made the short-selling error.
Surely, in the light of the different experience here, it is time for the SGX to review the stiff penalties introduced last year to see if they are still justified.
Isn’t it better for the SGX to impose an administrative charge on a trader for making a ‘fat finger’ error, rather than slapping a hefty fine of $1,000 on him?
At the very least, this will save the SGX the considerable time and paperwork involved in going through the many appeals made by traders against the fines imposed on them.
And collecting such huge penalties brings with it other problems - public scrutiny of how much fines are being collected and how the money is being used.
When the fines were imposed last year, the SGX told The Straits Times that ‘all penalties/monies collected do not go into the SGX’s revenue’. Instead, the amount would be earmarked for investor education activities.
The SGX’s latest annual report confirms that an investor education fund had been set up to ‘support initiatives that seek to improve the understanding of investors and their ability to make better informed investment decisions’.
Money for the fund had come from collection of fines imposed for breaches of SGX rules.
But the annual report apparently fails to shed light on the sum of money collected in the form of fines between October last year and June this year - a period which formed part of the SGX’s financial year ended June 30.
A back-of-the-envelope calculation shows that this sum might be considerable.
Take last Friday’s SGX buying-in list, which saw 16 counters ‘bought’ by SGX on behalf of short-sellers. Assuming each short-seller pays the SGX a fine of $1,000 for the breach, this would work out to a payment of $16,000.
Spread over a period of one year, the total sum collected by the SGX may work out to be as high as $4 million. Of course, the sum which the SGX has collected may be much smaller, as it could have waived the fines for the many who had appealed.
But rather than having a guessing game, it would be far better for the SGX to be fully transparent on the quantum of fines collected, and to give a breakdown on how the money is being spent.
That will also remove any lingering concerns that any of this money may become accidentally mixed with the profits it makes from its core business of earning a fee from clearing trades transacted on the local bourse.
After all, transparency is meant to be a watchword for all listed companies under its purview.
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