Wednesday, 29 January 2014

SGX Circuit breakers won't help small investors

A rather critical letter by Michael Dee in The Straits Times (Singapore) about the recently introduced "circuit breakers" and the Penny Stock Saga:

The Singapore Exchange's (SGX) new "circuit breakers" come 25 years too late, do not cover shares priced below 50 cents, and delay trading by only five minutes - it is 15 minutes on the New York Stock Exchange ("SGX circuit breakers to kick in next month"; last Thursday).

Other than insiders, who could possibly respond in the five-minute "cooling off" period? Yet again, the smaller investor is disadvantaged compared to remisiers, highly sophisticated players and high-frequency traders.

The circuit breakers would have had no impact on the recent penny stock fiasco beyond delaying the inevitable by a few minutes - and buying time for the big players and insiders.

Prior to their collapse, Blumont Group's price-earnings ratio was up to 500 and price-to-book value ratio was 60; Asiasons Capital's price-earnings ratio was more than 580; and LionGold Corp was virtually unprofitable, yet had a market value of up to $1.42 billion.

There were no discernible results to support these valuations, and no reaction from the SGX and Monetary Authority of Singapore (MAS) until it was too late.

Investors need, expect and deserve protection from unwarranted and manipulated price movements - both up and down. This comes from much greater transparency and regulatory rigour than what we are currently seeing from the regulators.

Investors would be better served by the SGX and MAS releasing a full report on what happened and why it happened. Only then would the scope of the issues be understood and solutions holistically designed to prevent unwarranted run-ups in share prices that attract unsuspecting buyers in "pump and dump" schemes.

Penny stocks trading as low as one-tenth of a cent are ripe for manipulation.

Thus, shares with prices below 50 cents and valuations below $50 million have no business being listed on the mainboard. A listing provides a misleading and inappropriate stature to companies that have neither earned nor deserve it.

The SGX needs an alternative exchange for these second-tier listings, with different rules to manage investor protection.

In fact, the SGX would do well to set investor protection as its No. 1 priority over commercial interests.

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