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8/15/2011

Financial crisis hitting stock markets


MAS is getting more clouts to deal with errant pushers of toxic products. This sounds like a good thing. What MAS needs to do is to be more proactive and look at the whole financial system as well, especially how stock markets are run around the world, and how dangerous products and systems are allowed to get into the stock market system to run riots and exploited the weaknesses of the system to prey on the small investors.

The exploding financial crisis in the US and Europe is affecting not only toxic products but also the stock market mechanism and processes. The plunge in Dow and Europe market had caused panic and the immediate response by the European govts is to curtail short selling. The damage that short selling could cause, and how this mechanism can be easily abused need no further explanation.

Short selling and many other new devices and systems have been introduced into the stock markets world wide, including high speed trading, derivatives, dark pools, programme tradings, etc that violate the principles of stock trading. The very basis for funds to employ these new gadgetry and systems works against how a stock market should behave. In the long run they will devour everything and lead to a loss of confidence in stock trading and even the destruction of this industry.

They also violated the sacred principles of level playing field and transparency. If stock markets allowed such principles to be transgressed with impunity and explaining them to be part and parcel of modern stock trading, there is a very high possibility that the stock markets would go the way of toxic notes and bonds. They could inflict more severe damages and consequences than just toxic products. The industry could collapse and many people, other than losing their investments, could also lose their jobs.

Eventually the blame will fall back to authority/regulators for allowing all the infringements of good market practices, principles and rules and regulations to be breached and not doing anything to prevent them. When it became another crisis like the minibonds, it will be disastrous and the authority cannot run away from this responsibility by claiming investors went in with eyes wide open. The authority has the responsibility to provide a fair system and level playing field. That is the basic principle and also the rationale for the existence of a regulatory body. The people trust that the stock market are there to provide a level playing field and MAS is there to see to it. Caveat emptor is not acceptable when a system is allowed to operate with unfair advantages to the big funds.

If ever the stock market collapses, someone will have to answer for it. The key questions will be whether there is a level playing field and whether the new trading platform provided the funds with an unfair advantage over the small investors.

5 comments:

Anonymous said...

'If ever the stock market collapses, someone will have to answer for it'

On the other hand, no one forces anyone else to play the stock market. It is entirely a voluntary personal decision.

To those who can make more money from loopholes and loose supervision of the stock market, they will demand more loosening.

To those who suffered losses, they will cry foul. Human nature is hard to fathom and difficult to satisy.

Anonymous said...

Exactly, buy properties, buy mini bonds, all willing buyer willing seller. No one is to blame.

Anonymous said...

Yes, as Bertrand Russel once said, "defeat cries out loud for explanations but victory, like charity, hides a thousand sins". In a sense, this may be applied in the stock markets.

Anonymous said...

Jackpot machine or stock exchange?

Anonymous said...

The MAS must take a look at how SGX is operating and whether there is a conflict of interest. It will be dreadful and irresponsible if the stock market ended up in a mess like the Lehman bonds and toxic notes with many investors hurt.

Are the high speed machines hooked up to the exchange to trade against small investors a fair deal? Are programme tradings fair to the small investors? Are dark pool operations transparent and fair to other investors?

Has the SGX violated its own rules and regulations to benefit itself at the expense of small investors?