Contra Trading Is Not The Cause

The Editor, The Business Times

In the past week, there has been significant press coverage on the now infamous trio of designated stocks – Asiasons Capital, Blumont Group and LionGold Corp.

The deflation of the bubble created by these three and other closely associated stocks have widespread impact on the industry and have affected investors ranging from hedge to long funds and retail traders alike across various intermediaries such as the private banks, foreign and local brokers.

There seems to be a misguided perception that contra trading was the singular cause for the bubble.

It is evident that a wide spectrum of traders participated in these counters through various means including leverage via margin accounts or other forms of leverage via brokers and private bankers.

To blame the current woes solely on Contra Trading defies logic when the extremely high trading volumes were contributed also by other leveraged means.  Why are other forms of trading ie margin or other forms of collateralized trading not to be blamed?

In fact, a greater portion of the trading losses may be residing in these leverage accounts seen in the ST article today on a bank force-selling of a position held by a prominent Malaysian personality.

Perhaps the crux of the issue lies not with contra or other forms of leverage trading but the failure by the industry to recognize and react in good time to the possibility that certain elements or parties may be seeking to exploit the system.

Arising from this incident, the industry as a whole – SGX (Singapore Exchange), SAS (Securities Association of Singapore), SOR (Society of Remisiers) and SIAS (Securities Investors Association, Singapore) – collectively could be more vigilant in safeguarding our market from being exploited by various elements which may affect the integrity of SGX as the market place – to the detriment of our investors.

There should however be a balanced approach to avoid stifling the market. There are examples of well-timed and self-initiated intervention by certain participants to try to remove the bubble pressure building up in some of the counters to lessen the impact on both investors and the intermediary of a full-blown meltdown.

Blaming the current outcome on contra trading is too simplistic to the point of being naive.

Contra trading has little to do with essentially a gross mispricing of a given counter. If contra trading is to be blamed then perhaps margin trading played a greater role in sustaining the bubble as positions can be held indefinitely as long as margin ratios are maintained. Do we also ban margin or collateralized trading?

We need therefore to see the wood from the trees.