Published June 29, 2009

Why exactly can't SGX have a cash market?

By R SIVANITHY

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OVER the past two weeks, the issue of how outstanding naked short-sold positions are handled in the local stock market has come under a bit of heightened scrutiny.

Specifically, the spotlight has fallen on the fines that the Singapore Exchange (SGX) levies on these open positions and the fact that if the exchange revived its now-defunct cash market or installed the Society of Remisiers' suggested 'immediate delivery' market - which in effect functions as a cash market - investors can avoid paying these fines.

This is because in a cash market, share transactions are based on a settlement period of (t+1) compared to the (t+3) in the ready market (t being the transaction day). So anyone who has oversold a position on date t can immediately cover it in the cash market before being caught short on (t+3) - and thus avoid a fine.

The letters ran in The Business Times over the past fortnight calling for a reintroduction of the cash market echoed calls made in this column several times over the past years - 'Revive cash market to run in tandem with buying-in' (Nov 16, 2004), and again two years ago (April 24, 2007) 'Time for exchange to relook buying-in process'.

It is important to note that a cash or immediate delivery market would only complement - and not totally replace - the exchange's buying-in process, because the latter would still be needed for positions that might not be covered via cash market purchases.

In today's market, investors who may have urgent need for cash for possible emergencies have to wait for around a week before receiving the money from share sales.

However, having a segment on hand where settlement and payment is based on (t+1) simply offers investors greater choice and flexibility in managing their daily trading and finances - and these are undeniably advantageous features of any capital market.

Now, if having a cash or immediate delivery market is clearly useful, why hasn't it been reintroduced?

Not many readers may have seen this, but this is SGX's official reason, given in a letter ran on Aug 31, 2007 in BT and signed by SGX executive vice-president and operations head Chew Hong Gian when responding to yet another reader's call for a revived cash market:

'The cash market was a feature of scrip-based trading when fixed settlement was introduced, for the sole purpose of allowing shareholders to sell physical share certificates to stockbrokers if they needed payment on the same day. When trading went fully scripless in 1994, the cash market was abolished to protect shareholders from shares being sold without their knowledge, as physical certificates no longer had to be produced.'

While the aim of investor protection is admirable, it is difficult to understand exactly how scrapping a market segment where investors can obtain cash or shares with minimal delay could represent a step forward for the local capital market.

Instead, in today's market, investors who may have urgent need for cash for possible emergencies have to wait for around a week before receiving the money from share sales. They also have to worry about inadvertent and often innocent overselling which, if not covered before 5pm, would incur the controversial financial penalties mentioned earlier.

Even though the number of transactions affected every day is very small (less than 0.005 per cent of daily volume), it is still a sore point with retail investors and remisiers - and generates unwanted criticism for SGX.

Finally, it is not immediately clear how investors are being protected by the absence of a cash market. Investors can still have their shares sold by brokers without their knowledge whether settlement is (t+1) or (t+3); moreover, since the mid-1990s when the cash market was abolished, the share trading system has undergone many changes to offer increased shareholder protection.

For example, investors today have their trading accounts linked to their bank accounts so there is no opportunity for anyone other than the owner of the shares to receive the money from sale of those shares, even if the shares are sold without their knowledge. All of which begs the question: what exactly is the objection to reviving a cash or immediate delivery market?