Loophole in Bursa’s trading system
Business & Markets 2013
Written by M Shanmugam of theedgemalaysia.com
Thursday, 04 July 2013 13:31
THE abnormal market close last Friday points to a weakness in the trading system of Bursa Malaysia, and this loophole suggests that such transactions can happen again.
The abnormal volume of transactions in eight stocks 10 minutes before the market closed on June 21 evidently cost the fund that ordered the trades dearly. Estimates put it at more than RM40 million but nobody will be able to put a finger on the quantum except for the fund itself.
Six stocks were sold at close to 30% of the market closing price while two stocks – STAR PUBLICATIONS (M) BHD [] and JCY International Bhd – were chased up. Star closed 29.72% higher with 4.473 million shares done in the last 10 minutes while JCY ended 36.36% higher with 22.44 million shares traded.
The entire exercise was done in the name of "portfolio re-balancing" by a US-based fund that had placed the orders with an international investment bank, which then executed the orders through a local investment bank.
The local investment bank, Kenanga Investment Bank, on its part, has stated that it was merely executing the orders and that the fund was undertaking a portfolio rebalancing exercise of its holdings in the region.
But were large volumes of stocks transacted in the other markets on June 21 as well? Were there abnormal trades or were the transactions well absorbed?
Nevertheless, the exercise raises the question of why a fund would embark on the last-minute transactions of eight stocks that are illiquid. The local broker that carried out the trade only received the orders in the last 20 minutes or so before the market closed.
But at what time did the foreign broker get the order from the client?
Considering the liquidity of the stocks, why didn’t the fund embark on a gradual selling? Did the portfolio need to be re-balanced on a single day?
Liquidity is a key criterion that any fund would look at, apart from a company’s fundamentals and the credibility of the management in making investment decisions.
If a stock lacks liquidity, funds exercise discretion in buying and selling it. Unless there is a change in the fundamentals of the company, which is not the case in the six stocks that were sold down, it is highly unlikely that the fund would adopt a strategy to dump the stocks.
As for the two stocks that were chased up, why was there the need to accumulate large amounts in a single day? Shouldn’t a position be built up over a period?
While the fund has lost out, the beneficiaries are those who soaked up the selling or sold when Star and JCY were sought after in the last 10 minutes of trading on June 21.
But there couldn’t have been too many investors buying and selling in the last 10 minutes of trade. This is because under the current trading system, the pre-market close starts at 4.45pm. Between 4.45pm and 4.50pm, there is a matching of trades, or what is termed a bidding process.
Anybody can put in any amount of shares to buy or sell. The single most important factor that determines the matching process is the price.
But how many would have anticipated that such a large volume of the six stocks would be made available between 4.50pm and 5pm on June 21? By the same token, how many would have expected the shares of Star and JCY to see such demand in the last 10 minutes of trading?
In the 10 trading days prior to June 21, the trading volume of the eight stocks on average constituted only a fraction of what was traded in those 10 minutes. For instance, the average volume for BATU KAWAN BHD [] between June 10 and 20 was only 31, 622 shares per day, but on June 21, some 344,000 shares were done in the last 10 minutes.
As for Star, the average daily volume in the 10 trading days before June 21 was 957,789 shares, but 4.573 million shares were transacted in those 10 minutes on June 21.
So, how many investors would have anticipated that such a large volume of shares in the eight counters would be available in the last 10 minutes of trade on that day?
This is not the first time such abnormal trades have happened. At end-May, there was an abnormal market close in the case of SapuraKENCANA PETROLEUM BHD [], when the stock jumped about 25 sen in the last 10 minutes, accompanied by a doubling of the volume.
An order to buy more than 10 million shares came in just before the market closed on May 31. Those who sold obviously benefited because the share price normalised the following trading day. Fortunately, SapuraKencana is a very liquid stock and the price did not move very much.
The reason why Bursa adopted the pre-market close strategy, from 4.45pm to 4.50pm, is to prevent what is seen as a "last-minute massaging" of key stocks to control the closing price or even the index. After 4.50pm, any amount of trades can be done but the price would already have been determined by then.
Now, it appears that there is a weakness, especially if large transactions of illiquid stocks are done in the last 10 minutes.
The local broker has put the blame on the sharp price rise and fall on the illiquid nature of the stocks. But market players believe there is more to it because there are other ways to ensure a more efficient price discovery for illiquid stocks.
To put the matter to rest, Bursa should consider disclosing the identity of the party or the brokers that bought the six stocks that were sold down or who sold the two stocks that were chased up in the last 10 minutes of trading on June 21.
M Shanmugam is managing editor at The Edge. This article was published in The Edge Malaysia July 1-7 issue