Sunday, 21 August 2011

When the smoke signals are right

I have been actively involved with the Malaysian share market for more than 15 years. Whenever there was a major announcement in a listed company I would take a look at the graph of the share price and the volume traded before the announcement. In more than 50% of the cases (a conservative estimate), there would have been a huge spike in volume and a large change in price, indicating a serious possibility of insider trading. Insider trading is very bad for any exchange, both for its image and for the 99.9% of the normal traders who are not privy to this kind of inside information.

Although I admit that investigating these kind of suspicious trading patterns is not that simple, Bursa Malaysia (BM) has a huge pool of employees and a database full with information regarding accountholders and trades done. It always stunned me why there was never any enforcement whatsoever on the issue of insider trading. Recently I did notice some rare activity on this area, but the alleged perpetrators only had to pay back their ill gotten gains. A one in a thousand chance to get caught and then only having to pay back the gains? I don't see the rationale for these kind of low punishments at all.

In the US Martha Stewart was convicted to 5 months in jail for insider trading and subsequently lying about it, Bursa Malaysia should follow this example. Forcing to pay back the ill gains or giving paltry fines will have no effect, only jail sentences will bring some much needed deterrent.

Next to this there is the issue of Bursa Malaysia being a listed company, with a profit goal. BM plays an important part in the enforcement: both regarding insider trading and the like, but also issuing prospectuses for IPO's, rights issues, RPT's etc and subsequently handling of the complaints (my experience with BM handling my complaints was simply horrendous). But since BM listed in 2005 I haven't seen any improvement in their performance regarding Corporate Governance (I do see though some improvement at the Securities Commission, but from a very, very low base and still very biased towards the smaller companies and players). Needless to say, enforcement does not bring in any money, in the contrary.

I have never liked any exchange to turn into a public company, I think exchanges need to show utmost integrity, transparency and enforcement, and should not be in the business of making money. All the money that the exchange makes is from the investors who trade. In particular I oppose Bursa Malaysia turning in a listed company for the simple reason that they didn't have their house in order (and still don't have). Bursa Malaysia made RM 744 million net profit in their last 5 years alone. Next to that tens of millions of options according to the ESOS scheme have been handed out to the top managers. This all is (for a good part) paid by the minority investors in Malaysia, and I think they should deserve to receive at least some decent enforcement back for that. BM talks a lot about providing a fair market and paying more attention to Corporate Governance. I wish I could agree with that but I haven't seen any concrete improvement on their part at all since they became a listed company. Getting companies from China listed in Malaysia or swamping the market with call options is not exactly what I had in mind when I think about better governance, in the contrary. The only positive news that I found over all those years was that of the implementation of the e-Dividend: too little, too late.

PS: Moolah wrote about the same issue in his very interesting blog. Although I don't like companies being privatised, in this case I agree for the full 100%.

P. Gunasegaran of The Star writes an interesting article about this matter (emphasis mine):

"They say that there is no smoke without fire. That may aptly sum up some of the untoward movements seen in the shares of some companies traded on Bursa Malaysia, a common enough occurrence. For years and years, we have had prices of companies move up or down based on what may be obvious insider information with shares often moving in the opposite direction post deal because the announced event had already been expected. What is surprising is that the rising smoke seldom gets investigated and very few, if any people, have been brought to account for the part they have played in leaking the information prematurely into the market for some frenzied trading and price shifts. That's a surprising state of affairs considering that the authorities have an arsenal of weapons to fight this insidious threat to fair trading on the market. But first, let's look at what's been happening. The most recent case was that of Esso Malaysia. This share started moving up in relatively active volume in May, reaching a high of RM5.84 on May 24. But it dipped to just over RM4 along with the broad market earlier this month, and then took a major spurt upwards close to the RM5 level after a news report on Wednesday that Exxon was selling its 65% stake in the company to San Miguel of the Philippines. However, no price was given. When the actual announcement came late that day, the speculators who had rushed in madly to buy the stock were caught the price at which San Miguel was buying was just RM3.50. That will be the price at which a mandatory general offer will be made. The stock declined precipitously by 92 sen to RM4.03 on Thursday. It seems fairly obvious to observers why Esso Malaysia was rising the parent company was selling out and insiders had got wind of it. What they got wrong was they bet the offer price would be a premium to the market but that was not the case. It was an expensive lesson for speculators and perhaps some insiders but there are times too when insiders can and do make a lot of money on leaked information. That may have been the case for some traders with the AirAsia-Malaysia Airlines share-swap deal with major shareholders. AirAsia started moving up strongly from around mid July, bucking the market trend to gain over 60 sen or some 17% ahead of the deal on Aug 9. Malaysia Airlines shares started moving upwards in high volume from around the start of August gaining over 25% in a matter of days. Both stocks bucked the market trend which was strongly downwards. Price and volume movements such as these should have attracted the attention of regulators. Frontline regulator, Bursa Malaysia, has an obligation to ensure orderly and fair trading but its officials have said in the past that healthy speculation is good for the market. In fact, since Bursa Malaysia is a listed company with a profit imperative, one may be forgiven for thinking that it may be a little reluctant to curb activities that increase trading turnover to which its profits are directly correlated. But, a clear line has to be drawn between speculation and insider trading nevertheless, and appropriate action taken for long-term benefit to the market. When somebody looks at a company and surmises that it may be ripe for some kind of a deal and buys the shares on that premise, then he is speculating he has no concrete information. If he has access to market-sensitive information which has not been publicly disclosed and uses this to profit himself or others by buying or selling the shares ahead of the deal, then he is committing an offence under securities regulations no buts or ifs or excuses, it's the law. The key alert here is a suspicious trading pattern. If there is concerted buying ahead of an important announcement which is good or selling ahead of one which is bad, then there is clear indication that there has been a leak of that sensitive information into the market. At those times, regulators must take their big sticks out and start swinging them. They have to mobilise all the arsenal at their disposal, examine the trading records and see where the leak may have come from. That's part and parcel of promoting an efficient, fair and orderly market to drive the message that nobody gets away scot-free by making use of inside information. Otherwise, there will be an erosion of market confidence over time and a degrading of the market. If regulators don't periodically demonstrate that they are against any form of manipulation in the market by taking the appropriate action immediately, they encourage more illegal action.
And, eventually things are going to get out of control. Better to be early now than sorry later."


  1. The root of all evil stems for the fact that Bursa is now a listed entity, a business.

    How can a business be a business without profits?

    And there lies the problem.

    With the focus on profit, how the could Bursa also be a regulator?

  2. Yes, exactly the wrong reward scheme: less enforcement is better for their business and vice versa. And the small investors are suffering because of that.

  3. Good blog & interesting article ... I suspect more than a few parallels with the situation here in Thailand

  4. Thanks Bruce for your comment, I really can't say much about it since I don't know the situation in Thailand, only in Malaysia. In Malaysia it all looks quite nice, glowing reports, lots of regulation and regulators, but if you look beyond that, then you find lots of situations that are very wrong.