Time to vary SGX’s pre-close routine
Uncertainty of timing will make it difficult to manipulate stock prices
By Goh Eng Yeow
23 March 2010
Last Friday, traders were startled by a sudden sell-off of local banking giant DBS Group Holdings at the closing bell which wiped out almost all the gains made by the Straits Times Index (STI) so far that day.
Until then, DBS had been trading within a tight range of between $14.52 and $14.68 throughout the day.
But two big sales, of 611,000 shares and 443,000 shares, at the pre-close – a five-minute period after closing bell used by traders to settle outstanding positions – sent it spiralling southwards to end a hefty 46 cents down at $14.12.
The sales came only minutes before DBS announced that veteran banker Peter Seah would replace Mr. Koh Boon Hwee as chairman from May 1 which set traders wondering if there was more than met the eye behind the sales – especially since the counter closed 24 cents higher at $14.36 yesterday.
‘This looks very calculated and deliberate. It can’t be an error because two big blocks were involved,’ one dealer was quoted by The Business Times as saying.
But DBS was not the only victim of the sudden sell-off last Friday. Other STI component stocks, including Sembcorp Marine, United Overseas Bank and OCBC Bank, also had much of their earlier gains sliced off by the pre-close sales.
Jardine Matheson, however, added another 80 US cents (S$1.11), on top of an earlier rise of 70 US cents, to end the day with a whopping US$1.50 gain to US$35, after a sale of 52,000 shares at the pre-close.
The wild gyrations in prices of these STI components have rekindled a debate on whether the pre-close routine – introduced a decade ago to ensure that prices would not be manipulated at the closing bell – needs to be revamped.
To be fair, the Singapore Exchange (SGX) is not the only market where a short period is set aside after the closing bell for traders to put up orders to settle outstanding positions.
With trading interest melting away in recent months and daily market volumes languishing at just over one billion shares, there is a growing concern that the STI is artificially propped up through the purchase of illiquid component stocks at the pre-close session.
As Friday’s sudden sell-off of DBS and other blue chips attested, the drying up of market liquidity makes it just as easy to ‘dress down’ stock prices as well.
To complicate matters, it is difficult to punish the culprits who may be responsible for manipulating the share prices.
Last April, the SGX said that it would probe a sudden spike in Jardine Matheson’s share price which caused the STI to close up 12.4 points, despite falling by as much as 61 points during the day.
Nothing further has been heard about the investigations since then.
Market observers said that this reflected the difficulties of imposing any form of penalties on those who might be guilty of rigging share prices.
After all, dealers executing the trades could plead innocence by claiming they were only fulfilling clients’ wishes.
The difficulties are further compounded by the fact that a lot of trades are now routed through overseas programme trading – making any enforcement action virtually impossible.
What can be done?
Since last year, dealers have been arguing that the SGX should tackle the problem with a trading-related solution.
The SGX has a state-of- the-art trading engine which can cope with two billion orders a day. This means that it should be able to fix problems which were not foreseen when the pre-close routine was introduced a decade ago.
With the new SGX trading engine, it is no longer necessary for the pre-close to end exactly at 5.05pm to allow the matching of all unfulfilled orders in the system.
Instead, the timing of the pre-close can be varied between, say, 5pm and 5.10pm.
The uncertainty of the pre-close’s timing will make it expensive for a stock manipulator to move the price of any counter in a certain direction, as he will need far more resources to take out all the potential buyers or sellers.
It would also give traders something to look forward to – as the element of uncertainty at the pre-close spices up the trading activities each day.