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9/10/2009

The fragility of our stock market

Yesterday was the 10th anniversary of the SGX and it was all celebration and a job well done. Everyone was given a pat on the back for their contributions to the success and growth of the SGX from 500 companies to more than 700 companies. And we are now recognised as a serious international player. The success of a stock market depends on many factors, the system and administrator, the products and the players. I have dealt with some of the problems of system flaw in the past, especially the uneven playing field which I still find it unacceptable and unfair to the small players. I will now briefly touch on the products and players in the market. Other than our local companies, we have introduced stocks from some 20 companies as proof of our progress in internationalising our stock market. I wonder how many of these stocks are being traded and worth the cost of having them listed in our market. The more glaring issue is the S Chips. These came in to replace the Malaysian CLOB when Mahathir threw in the spanner. Are we better off? Or are the investors better off? Do we get more money for the investors or more outflow of our hard earned money with a net loss due to frauds and misrepresentation? What is the bottom line? The players in our market are the big foreign funds, local broking houses, small and big local investors, and the increasing role of remisiers own trading. The foreign funds come and go, some short term, some trading furiously like the small traders or worst, with programme trading to scalp whatever they can from the market. Both the funds and broking houses are taking full advantage of their low cost, ie, practically no commission to trade against the small investors. Who will win in such a game is obvious. With commission dwindling to a level that it is no longer worth the risk exposure, many remisiers are resorting to their own trading. Why risk thousands or hundreds of thousands of dollars for a $20 or $200 commission. The mistakes are very costly and so are bad debts. Not many people understand the role of remisiers and how unfair is the system towards them. With a small population of active investors, the market is just unsustainable without the remisier acting as a multiplier through their role as the guarantor and money lender to the investors. No banks will take such risk and exposure with minimal or no collateral. The alternative is not to allow such risk and exposure in the system, which means the market will practically come to a standstill, with negligible trading activities. There was a myth that with the introduction of internet trading, there is no need for this middleman. This has proven drastically wrong as the cost to maintain such a system negates the pittance returns from the traders. How many employees can actually trade online when they are working in their offices? The big players have no time to stick to a computer terminal when a phone call is all they need to do. How long can the remisiers continue to trade on their own and to make money out of the system is an issue that will soon play itself out. The recent mini bullrun is an aberration. In most instances, the remisiers are losing their pants because of the uneven playing field and programme trading. Now there are things like dark pool, preview of trading data, speed trading etc which all favours the big players. Assuming that the pool of remisiers find that they cannot win in such a market and call it a day, assuming that no contra trading is available as there is no remisier to be the middleman to act as guarantor to pay for the bad debt, how active can our market be? Will the big funds still be here when the small investors are no longer there to be scalped? Is our market sustainable in the long run with such a small pool of traders and with increasing number of stocks and derivatives being introduced into the market?

2 comments:

Wally Buffet said...

Get out of the conundrum by:

1. Investing only in established local blue chips. When the foreign funds fight with the local remisiers who are trading on the sly and small investors, the blue chips will invariably rise and you just swoop in and lock in your profits.

2. With internet internet stock trading and banking, don't trade as opposed to medium to long term investing in the local stock market. As you say, this market is too small for any meaningful action. Besides, it is sinful to cause more people to lose their CPF investments. Trade in large markets such as the LSE, NYSE, Nikkei and even Hong Kong which has a more sophisticated market than ours.

3. Get out of the remisier business. It is a sunset business with the advent of the internet. Most remisiers are just order takers, no financial market knowledge. Some are even not fit to sit in the trading room. The days of millionaire remisiers are over. For every one that makes it, ten falls by the wayside and lose money because defaulting clients are too many. Ah Longs can resort to obnoxious means to recover their money, remisiers can't unless they like to spend time in our Changi Resort.

4. In any game, if you can't win them. Join them.

Anonymous said...

Do we see or expect the local stock exchange to fail soon ?

patriot