Date: May 9, 2022
First published in Straits Times on 8 May 2022
The penny stock crash of 2013 must surely rank as one of the darkest chapters in the annals of the local market, given that it wiped out more than $8 billion in market value within a short space of time.
The crash came about when the Singapore Exchange (SGX) had to intervene in the trading of three stocks, Blumont Group, Asiasons Capital and LionGold Corp, known collectively as BAL, before a full-scale investigation was launched into the possibility that BAL’s share prices had been manipulated.
That investigation has now proven that BAL’s shares had been artificially inflated between August 2012 and October 2013, through a web of 187 trading accounts held with 20 financial institutions in the names of 58 individuals and companies.
However, although the masterminds behind the scheme have now been convicted, thus drawing a curtain on the saga, it is important for investors to understand the roles of the key parties involved, and the steps they should be taking to avoid a repetition.
Role of individual investors
First, retail investors must always bear in mind that Singapore operates a disclosure-based regime, one in which the rule of “caveat emptor” or “buyer beware” plays a central role.
In such a regime, the onus is on investors to do their own homework to understand the investment and its risks fully before investing and for companies to make proper and timely disclosures. In this connection, it is very important to recognise that penny stocks are low-priced for good reason – many, if not all, cost only a few cents because of an absence of earnings or strong fundamentals.
The market may occasionally get the pricing wrong for some stocks but if a counter has been languishing at rock-bottom levels for a lengthy period, then chances are that the market has got the pricing right.
So, if a penny stock, particularly one that is loss-making and is on SGX’s watch list because of years of reported losses, starts to shoot upwards for no apparent reason, then investors should exercise care and think twice before jumping on board as rising prices may not be fundamentally justified. This was exactly the case in the penny stock saga.
Role of SGX
Second, with regards to SGX’s function as a front-line regulator, investors should understand the tools that it is allowed to employ. These are queries, designations and suspension.
When it detects unusual activity, SGX will query the respective companies on unusual trading patterns as and when these occur.
The main lesson here is to recognise that such queries are aimed at raising red flags to alert the market that something out of the ordinary could potentially be happening.
However, SGX has made it clear that issuing a query is not an expression of opinion on the stock queried nor is it the function of SGX to comment on the counter’s value.
If companies do not make any announcements despite being queried but their share prices continue to rise, then caution should be exercised by investors as that is a sure red flag for them.
In 2015, an additional level of signalling was added in the form of “Trade with Caution” alerts. This is a higher-level signal from the regulator and is usually accompanied by information gathered from the exchange’s surveillance of trading activities. In some of these alerts, SGX has included the fact that a small handful of individuals were responsible for the bulk of daily volume.
If SGX believes that excessive speculation surrounds trading or that a false market exists, it can suspend trading before declaring a stock as a “designated” security, which is effectively an even higher escalation of the red flag signals that may have already been sent.
Designation means that there are certain restrictions imposed on trading; in the case of BAL, no short selling was allowed whilst all purchases had to be paid for upfront and in full.
The objective of designation is to restore market equilibrium by removing the impact of anomalies like excessive speculation on price formation, and to allow the price of the stock to be formed through demand and supply forces in an informed market.
Not surprisingly, as one would expect, it was BAL being designated by SGX that triggered the crash in their prices that reverberated around the whole market.
Role of brokers
It has often been asked by investors how the manipulation of BAL shares escaped the notice of the broking houses involved as well as the other related financial institutions.
Whilst brokers say that it is difficult for broking firms to discern who are the true beneficial owners behind various trading accounts, there should be automated systems that detect irregular trading behaviour, such as when multiple trading accounts execute similar trades within a short period of time of each other in the absence of any significant corporate announcements.
In order to aid brokers, SGX and the Monetary Authority of Singapore have issued Trade Surveillance handbooks on how to spot manipulation activities.
For example, Series One issued in September 2016 deals with “spoofing” and “layering”, which are ways to create an artificial impression of high demand, whilst Series Two issued in May 2018 deals with “wash trades” where the buyer and seller are the same party. It’s worth noting by investors that wash trades were heavily employed in BAL’s case.
Will there ever be a repeat of the penny stock crash? It’s possible – as long as markets are a place where greed and fear thrive and where big money can be made, there will always be those who will try to exploit these emotions and manipulate prices for their own benefit.
However, given the regulatory steps which have been taken post-2013 and as long as everyone does their homework before investing, there is good reason to believe that repeats will be few and far between.
The best protection for a retail investor is investing with knowledge. There is no excuse for any retail investor to be ignorant, given the wealth of investor education available in Singapore.
All should also learn to recognise the signals that regulators send to alert the market.
- The writer is Mr David Gerald, Founder, President and CEO of the Securities Investors Association (Singapore)