Martin Lee @ Sg
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The Penny Stocks Debacle in Singapore

What do stocks like Blumont, Asiasons, LionGold have in common?

The recent collapse of prices in some penny stocks in Singapore has led to many questions being raised about our Singapore stock market and the role of SGX as a market regulator.

There has been discontentment not only among investors who lost money, but also among some remisiers and other professionals in the investment community.

I do not want to repeat the whole story here as I’m sure there are already many articles written about this topic.

But I would like to offer my views of what I consider to be the hard truth.

Our Singapore Stock Market is Like a Mini-Casino

If you choose to treat the stock market as a casino, you can win or lose. For every loser, there is a winner (the converse is not exactly true).

If you make a decision to play in a casino, you must be able to accept the eventual outcome, be it a gain or a loss.

Those who keep on emphasizing on the billions of dollars that are lost due to the price collapse of the three penny stocks fail to get the point that the market capitalization was a fake one as the price was at an artificial high level in the first place. Also, for every dollar that was lost by someone, it was actually made by another party.

However, if the ones who profit are insiders who have failed to make the required dealings disclosure in a timely manner, they should be punished severely (at least financially).

Seriously, in this time and age, can this kind of explanation be accepted with no repercussions?

X only had knowledge of the change of his level of interest on the bank loan recall/forced sale of securities on xx Oct 2013 and was unable to inform the Company as he was traveling and had no internet access.

Also, do banks inform their clients of a forced sale only after a few days? These are things that should be investigated thoroughly.

Are Contra Facilities Good or Bad?

The availability of contra facilities means that our stock market is even better than a casino. Which casino allows you to borrow chips for 3 days without collateral and does not charge any interest?

By the way, there is no collateral required because it is put up by your broker. If you default on your contra losses, they are the ones that need to pay for you. Personally, I feel that the commissions they earn is too little to compensate them for their risk, even though they might not need to do anything if you are using an electronic platform.

SGX will always support the availability of contra facilities because it promotes a higher trading activities. Being both the regulator as well as the listed entity that will profit from higher trading activities, there is an inherent conflict of interest.

The brokerage firms are also happy with the current arrangement because they can have their cake and eat it (higher trading volume with default risks taken by their remisiers, who are independent self-employed contractors).

The platforms that allow you to buy shares using cash that is paid upfront are able to charge a lower commission as they do not need to pay out (or may pay very little) commissions to any brokers to bear the default risk.

Since SGX  has claimed that contra trading is not determined by them but is something that is offered by the brokers, only a true regulator (i.e. MAS) can put a stop to it. Just like how they can prescribe housing loan formulas, MAS would be in a position to ban the offering of contra facilities outright.

However, it will take a very strong political will to do it due to the vested interests from various parties.

Remisiers who are lobbying for such a move might have to consider the repercussions carefully because if it was implemented, I would expect brokerage firms to cut their commissions (to remisiers) and even layoff some of them as many clients use an electronic trading platform nowadays.

Personally, I would like to see the contra and 3-day settlement a thing of the past. I think it has done more harm than good. In my view, it is like putting a casino in everyone’s computer.

In my next article, I will talk about some common sense approaches that you can adopt to prevent you from becoming a victim of lousy penny stock investments.

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1 comment
Three Golden Rules in Shares Investing says 7 years ago

[…] This is a follow-up article on my previous post, The Penny Stocks Debacle in Singapore. […]

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