Published July 3, 2009

Good governance means having no blind spots

By R SIVANITHY

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IT IS one of the uncomfortable truths about the stock market that when it comes to regulation and governance, 'blind spots' abound. Somewhat analogous to military 'no-fly zones', these no-go areas are supposedly too sensitive to discuss openly, with the result that everyone has come to believe they are best left untouched.

Yet when it comes to disclosure, governance and investor protection, shouldn't all areas come under the same scrutiny and shouldn't all the stops be pulled out to ensure the playing field is as level as possible?

One such blind spot was featured in this column two weeks ago ('Level the field by disclosing house trading volumes', BT, June 19), where it was argued that retail investors would benefit from knowing the proportion of daily volume generated by house traders, not necessarily for every single stock but at least for the top 20 most actively traded counters.

Furthermore, if an aggregate proportion is disclosed for each day's total turnover, analysts who track Singapore Exchange (SGX) can fine-tune their revenue and earnings estimates, thus improving SGX coverage and, by extension, benefiting the exchange's shareholders.

Are we confident that this call will be heeded? Not at all; it was first made more than three years ago (a BT commentary on Feb 8, 2006, titled 'Proprietary trading creates false market?'). It didn't lead to any changes back then, so there's no reason to expect a different reaction now.

Also, everyone 'knows' that you can't disclose this kind of sensitive information. Why, imagine how it would look if it were to emerge that maybe half (or more?) of daily volume is generated by dealers trading on behalf of their firms and who either pay zero or minimal brokerage? We can't have that now, can we?

Another thing everyone 'knows' about is odd movements in the major indices which sometimes occur in the final seconds of trading - sometimes, though not always, on low volume.

Given that movements in the index can exert significant influence on sentiment, it stands to reason that such oddities have to be examined and the findings revealed for public consumption. Yet, this has never been done.

What typically happens is this: first, there's outrage at how blatant the index rigging was; second, brokers and the press speculate on who was responsible or why it was done; third, the exchange may or may not make some kind of holding statement; and fourth, the passage of time results in the episode being forgotten - at least until the next time it happens.

This calls to mind a related area where 'knowing' is widespread but action is lacking: the familiar exchange between SGX and companies whose shares exhibit sudden, unusual movements.

From the public's viewpoint, the process is now so familiar that it borders on the tiresome: SGX asks the companies why their shares are in sudden play; the replies are almost always 'sorry, we have no idea'; and, like the index-rigging example, the incident is then swiftly forgotten.

Assuming companies are really ignorant, surely it's logical to ask why the presumption of guilt should begin and end with companies? Why not query the brokers who executed the orders to explain their actions? You could even take this a step further and argue that the investing public would be better served if the exchange then published the findings of these queries. After all, if we accept that 'material information' is any price-sensitive data, then it would be logical to assume that anyone suddenly buying or selling at prices vastly removed from the prevailing market price must possess material information that may not be publicly available, and so should be queried.

Granted, it isn't practical to look at all odd price movements, but it could be done selectively, such as when it results in a large shift in the main index.

Yet, ask anyone in the finance industry whether brokers who execute odd, index-influencing trades should be queried and the findings published, and the answer is usually 'no'. Why? Well, because no one else does it, it's too time-consuming and, besides, it might be a deterrent to foreign houses who rely on opacity and the occasional bit of jiggery-pokery to make money. And, as everyone 'knows', you can't offend the foreign houses, can you?

There's more, but suffice to say that if the spirit of true and full disclosure is adhered to, then no stone should be left unturned in the quest to provide useful information to the investing public. Hedge fund activity, short-selling positions, the real names behind nominee accounts, proprietary desk volume, reasons for index rigging - these are just some of the areas which everyone 'knows' about but for which no remedial action has ever been forthcoming. Maybe it's time all this changed, all blind spots were arrested - and 'knowing' got translated into doing.