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23-03-2013, 07:22 AM
I didn't know whether to laugh or cry when I read this. Brokerages are literally killing themselves by leveraging on the contra-trading rule, then later slamming trading curbs when things heat up. So they want the best of both worlds? People trading feverishly and providing them with commissions, yet not too fervently so as to ensure they don't go bust? Now how does that work, eh? 
The Straits Times
www.straitstimes.com
Published on Mar 23, 2013
PLAY OF THE WEEK
Penny stock run wavers on trading curbs
Trading volumes plunge as brokerages place limits on small-cap share exposure
By Goh Eng Yeow Senior correspondent
DEBT-LADEN Cyprus might have grabbed the headlines this week, but the big news for many traders were the steps taken by brokerages to slam the brakes on penny stock trading.
UOB Kay Hian, for one, has put caps on a client's exposure to the small-cap sector.
An investor, allowed to trade up to $150,000 worth of shares, will be capped at $50,000 for each penny stock.
That rises to $100,000 for a single small-cap share if the investor has a higher overall trading limit.
For good measure, it even threw in a four-page memo on its website naming the affected stocks.
Not surprisingly, trading volumes have tumbled sharply as traders react to news of the brokerage trading curbs.
Just three weeks ago, overall daily market volumes soared to a record high of 12.2 billion shares. By Monday, the trading curbs had sent daily volumes tumbling to just 3.05 billion before improving to 5.5 billion shares yesterday.
You can't blame brokerage bosses for getting nervous and taking steps to protect themselves from any collateral fallout if the penny stock bull run screeches to a halt.
Penny stocks have been rallying hard, pushing the FTSE ST Catalist Index - which tracks 109 small-cap stocks on the junior board - up a startling 31 per cent since November.
What makes these shares so attractive is that they cost a few cents apiece, making them affordable to traders who like a quick bet.
But they mostly feature loss-making shell companies whose only attraction is to become takeover targets for ambitious businessmen planning to reverse their operations into them.
There is another reason to explain the sudden burst of interest in penny stock activity - the so-called contra trading system that exists only in Singapore and Malaysia.
Unlike other markets where an investor has to come up with cash upfront before he can buy any shares, a trader here has up to three days to pay for his stock purchase.
During this period, if the stock price goes up, he can sell the shares, offsetting his sale against his purchase, and collect a profit without ever having to come up with any cash to make payments.
Such an arrangement means that brokerages are indirectly financing the liquidity-driven penny stock rally.
So as stocks go up, they get correspondingly more worried about the potential losses that may ensue if there is a big market correction.
It does not help when some of these favourites subsequently dived in prices.
One example is Myanmar play WE Holdings, which plunged from 18.2 cents to 6.8 cents in just one week, purportedly on completion of a stock placement.
Then there was Rowsley, which had appeared unperturbed by the turmoil afflicting other penny stocks, until it suddenly plummeted by 17.5 per cent to 40 cents a week ago.
This was said to be due to the curbs slapped on it by a big brokerage during trading hours.
Some traders have complained about the arbitrary manner in which brokerages have imposed trading restrictions on penny stocks, arguing that such moves are material and should have been regulated by the Singapore Exchange.
But then again, there would have been no need to impose any curbs if there had been any fundamentals supporting their run-up in the first place.
engyeow@sph.com.sg
The Straits Times
www.straitstimes.com
Published on Mar 23, 2013
PLAY OF THE WEEK
Penny stock run wavers on trading curbs
Trading volumes plunge as brokerages place limits on small-cap share exposure
By Goh Eng Yeow Senior correspondent
DEBT-LADEN Cyprus might have grabbed the headlines this week, but the big news for many traders were the steps taken by brokerages to slam the brakes on penny stock trading.
UOB Kay Hian, for one, has put caps on a client's exposure to the small-cap sector.
An investor, allowed to trade up to $150,000 worth of shares, will be capped at $50,000 for each penny stock.
That rises to $100,000 for a single small-cap share if the investor has a higher overall trading limit.
For good measure, it even threw in a four-page memo on its website naming the affected stocks.
Not surprisingly, trading volumes have tumbled sharply as traders react to news of the brokerage trading curbs.
Just three weeks ago, overall daily market volumes soared to a record high of 12.2 billion shares. By Monday, the trading curbs had sent daily volumes tumbling to just 3.05 billion before improving to 5.5 billion shares yesterday.
You can't blame brokerage bosses for getting nervous and taking steps to protect themselves from any collateral fallout if the penny stock bull run screeches to a halt.
Penny stocks have been rallying hard, pushing the FTSE ST Catalist Index - which tracks 109 small-cap stocks on the junior board - up a startling 31 per cent since November.
What makes these shares so attractive is that they cost a few cents apiece, making them affordable to traders who like a quick bet.
But they mostly feature loss-making shell companies whose only attraction is to become takeover targets for ambitious businessmen planning to reverse their operations into them.
There is another reason to explain the sudden burst of interest in penny stock activity - the so-called contra trading system that exists only in Singapore and Malaysia.
Unlike other markets where an investor has to come up with cash upfront before he can buy any shares, a trader here has up to three days to pay for his stock purchase.
During this period, if the stock price goes up, he can sell the shares, offsetting his sale against his purchase, and collect a profit without ever having to come up with any cash to make payments.
Such an arrangement means that brokerages are indirectly financing the liquidity-driven penny stock rally.
So as stocks go up, they get correspondingly more worried about the potential losses that may ensue if there is a big market correction.
It does not help when some of these favourites subsequently dived in prices.
One example is Myanmar play WE Holdings, which plunged from 18.2 cents to 6.8 cents in just one week, purportedly on completion of a stock placement.
Then there was Rowsley, which had appeared unperturbed by the turmoil afflicting other penny stocks, until it suddenly plummeted by 17.5 per cent to 40 cents a week ago.
This was said to be due to the curbs slapped on it by a big brokerage during trading hours.
Some traders have complained about the arbitrary manner in which brokerages have imposed trading restrictions on penny stocks, arguing that such moves are material and should have been regulated by the Singapore Exchange.
But then again, there would have been no need to impose any curbs if there had been any fundamentals supporting their run-up in the first place.
engyeow@sph.com.sg
My Value Investing Blog: http://sgmusicwhiz.blogspot.com/
