Central Depository revamp long overdue

SGX should speed up overhaul now that short-selling rules have started

THE new short-selling reporting requirements on the Singapore Exchange (SGX) have proceeded smoothly despite concerns over their implementation.

The rules, which kicked in last week, are designed to add transparency to what has been a hazy corner of the market.

A trader who enters a "sell" order now has to specify if it is a normal sale - one backed by shares already owned - or a short sale. This is where the seller either does not own the shares or has borrowed stock to sell.

The SGX then collates the short-sale information for every stock and publishes the data before the start of trading the next day.

The rule change marks the first time short-selling data has been made available to the investing public, and what an eye-opener it has turned out to be.

It seems that staid blue chips and highly risky penny stocks are equally likely to be short-selling targets.

In fact, the data shows that some blue chips are "shorted" even more than their small-cap counterparts as a proportion of their total trades.

Take, for example, plantations giant Wilmar International, a component stock on the Straits Times Index (STI). Short trades accounted for 49 per cent of its daily turnover last Tuesday and another 41 per cent last Wednesday.

The same goes for Thai Beverage, which replaces IHH Healthcare as an STI component stock from today. Short trades made up 19.7 per cent of its trading volume last Tuesday and about 32 per cent last Wednesday.

In contrast, while penny stocks dominated in terms of the number of shares shorted, the proportion in terms of their total trades is far smaller.

So even though last Wednesday's most actively traded counter SingXpress Land, since renamed SingHaiyi Group, attracted 210.8 million of shorted shares, this accounted for only 9.3 per cent of the 2.26 billion shares that changed hands that day.

Intriguingly, the day before, its short trades came up to just 1.43 million shares, or 0.3 per cent of its total trades of 467.3 million shares.

What does this suggest? It is a stretch of credulity that short- sellers should find blue chips even more desirable short-selling targets than the actively traded penny counters, which encounter double-digit price movements in percentage terms.

More likely, fund managers and institutional investors, whose briefs are confined to blue chips, have taken greater care to ensure that their short-selling orders are correctly marked.

It's likely that the many active retail investors who trade online simply key all their orders as a normal sell, given the difference a split second may make on their selling prices in the volatile penny stock environment.

Still, it is unlikely that their intention is to manipulate the market in any way, since that may attract fines of up to $50,000 or imprisonment for up to two years - or both.

But now that disclosing short-selling data has become part and parcel of the market, the next step should be to iron out any issues to ensure that investors can make an informed trading decision.

The SGX should accelerate its promised overhaul of the Central Depository (CDP), which holds the shares of investors.

It seems such a pity that while the local market enjoys what is reputedly the fastest trading engine in the world, dealers and remisiers still have to ask clients about the nature of their sell orders when they are called.

"Isn't this so Jurassic Park, asking clients if they have stocks to sell or not? Surely, this is the job of the CDP to link up the stock trading accounts to it so as to ensure that an investor has shares to sell in the first place. This is so much ado over nothing," one remisier said.

His observation points to a structural fault in the CDP, which has been a bugbear in the stockbroking community over the years: The broker does not know what shares his client keeps in the CDP.

Worse, even his client may also not be able to recall, unless he checks his CDP account.

This is unlike other markets such as Hong Kong, where stocks are kept with the broker so that there is no confusion over whether a sell order is a normal sell or short sell when a client wants to offload shares.

SGX boss Magnus Bocker has suggested that once the promised CDP overhaul occurs, brokers will be able to gain access to a client's CDP account to find out exactly what stocks he has, if given permission.

But more than a year after disclosing his ambitious plan to reform the CDP, nothing further has been heard on the subject.

Until the CDP is revamped, all one can say is that the short- selling data offers some insights on the volatility behind certain stocks.

But it will be, at best, an incomplete picture of the short- selling taking place here.

This story was first published in The Straits Times on March 18, 2013

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