Published October 26, 2009

Trading curbs: the curious case of Transcu

By R SIVANITHY

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THE recent circumstances surrounding UOB-Kay Hian's imposition of trading curbs on the shares of life sciences firm Transcu Group, which precipitated a collapse of those shares, raises a few important regulatory issues for the authorities to ponder.

The most pressing question is of course the most obvious, namely, how such announcements are to be communicated to the public in the future.

In Transcu's case, rumours of an impending trading curb circulated as early as the morning of Tuesday, Oct 20, and placed the stock under intense pressure throughout the day - hours before the broker actually confirmed that it was to restrict trading in the counter.

If the playing field is to be level for all investors, then given the potentially material impact such stockbroking decisions can have on a stock's price, it is essential that the Singapore Exchange (SGX) work with the broking community to establish a set of procedures on how brokers who want to properly manage their risks can best accomplish this without disadvantaging any segment of the investing public.

For example, it may be necessary to make it a compulsory requirement for houses like UOB-Kay Hian, who believe that speculative fever in a particular stock like Transcu has reached dangerously risky levels not justified by the fundamentals and who have decided to limit their exposure to that stock, to alert the SGX and the company's management as soon as the decision is made to impose trading restrictions. Once this is done, trading must be halted with minimum delay while the information is disseminated to the market.

Of course, such steps may not prevent the stock crashing, but they would at least recognise that crucial, price-sensitive information need not always come from the company concerned but may also come from external sources whose actions can influence trading. Moreover, having a proper set of procedures for handling trading curbs would minimise uncertainty and help preserve, as far as possible, an 'orderly market'. Instead, in Transcu's case, there was no information forthcoming that day, leading to 218 million shares changing hands, general bewilderment among investors as to what was going on, and a 21 per cent crash in the share price.

The other interesting angle, of course, is to look at why such curbs are imposed in the first place since brokers are revenue-maximising entities. Any firm that takes steps which could limit that revenue suggests something drastic has occurred.

In Transcu's case, for the six trading days preceding UOBKH's curbs, the share price had inexplicably shot up from 11.5 cents on Oct 8 to 19.5 cents on Oct 19, a gain of 70 per cent that made it the local market's top performer when the Straits Times Index only managed a 2 per cent rise over the same period. This, for a company which has reported mainly losses and whose latest quarterly report is a loss of $7 million from revenue of just $1.4 million.

Other than an announcement of a private placement of 320 million shares at 9.6 cents each on Oct 12, which is news that cannot reasonably be expected to get the pulses racing and send a stock's price shooting, some might even argue quite correctly that placements are dilutive and so should cause the price to fall. There were no other developments to account for the sharp rise.

Curiously, over the period when Transcu's price was rising in increasing volume there was also no query from SGX on possible reasons for the sudden spike in price and volume, as is often the case for other stocks which display similar odd behaviour. Surely surveillance personnel would have been alert to the fact that here was a company which has reported consistent losses but has suddenly seen its shares surge by a large amount in high volume, and as a result, would have at least sent a perfunctory query to the company.

No matter, what is important is that all concerned learn from the incident and take steps to ensure that, as far as possible, there is smooth handling of trading curbs when a broker decides to impose them on a speculative, runaway stock.