Left Brain - Talking Stock

Super Enterprise
The Kuala Lumpur Stock Exchange (KLSE) has been actively designating several securities, including Paragon, Repco, and Sarawak Concrete, in the last year. The designation imposes trading restrictions on the counters. Specifically, the buyer of the stock must pay cash upfront for the purchase and the seller is required to deliver the share scrips before any sale. This policy measure is intended to curb excessive speculation, reduce price swings, and protect minority investors. The question addressed here is whether designating securities succeeded in achieving these objectives?

A straightforward case study analysis of the three episodes suggests that designation appears to do more damage than good. More often that not, the announcement of a designation sends the share price to a free fall for a short period but a sharp rebound occurs quite shortly after that. The volatility of the stocks increases two-fold with such an announcement.

Another important effect from the designation is on the liquidity of the stock. The imposition of these trading rules reduces the liquidity of the stock as sellers must have the scrips in hand and contra-buying is not permitted. Surprisingly then, the thinner liquidity actually facilitates the manipulation of a stock. A small volume of buying during the post-designation period can lead to large price jumps, causing even more volatile price behaviour. Not surprisingly then, we observe for the episodes summarised below that dramatic price increases follows even after the designation of a stock.

Given the impact such announcements have on the behaviour of the stock price, it is hard to defend the authorities' action as being protective of minority interests or as a dampener on price swings. On the contrary, the episodes suggest that designation increases volatility and reduces liquidity, hurting minority investors in the process.

Sarawak Concrete

Paragon

The Verdict

Arbitrary Selection Process

Hands-off

Main

Super Enterprise: April 2

Super Enterprise, which was listed with an offer price of RM2.40 in April 1993, had been rising aggresively. On April 1, the share price closed 14.4 percent higher at RM28.25, on rumours that there may be a reverse takeover of the company.

The designation on April 2 reined in the share, bringing down the price by 34 percent to RM18.60 at the close, down RM9.65 from the previous day's close. The designation squeezed Super's trading volume from 2.5 million shares to only 0.25 million shares, 10 percent from the previous day.

On April 3, Super rebounded up by RM4.40 or 24 percent to close at RM23, with some volatile trading as the price swung from a low of RM17.70 to a high of RM24.90. By April 12 when the curb on Super Enterprise was finally lifted, the share price had climbed to RM28.50, back to where the price was when it was designated. On April 13, the share price soared RM1.50 to reach another record high of RM30.

Sarawak Concrete: July 4

On July 4, the KLSE designated Sarawak Concrete after the stock hit limit-up twice on rumours that the company would be getting contracts from the Bakun dam project. The stock had jumped RM6 to end the day at RM16.10 on July 3.

The designation had a temporary effect as the share price dipped 13 percent to RM14 in early morning trade on July 4. By late morning however, the stock hit limit-up to RM20.90, and a second limit-up in the afternoon to finish at RM26.40 on closing. Liquidity had shrunk on the counter, and it took only a volume of 133,000 shares to move the counter by RM10.40 or 64 percent.

Paragon: November 12

More recently, Paragon became a designated stock with effect from Nov 12 after the stock soared up by RM1.60 on Nov 7, and by another RM5.60 on Nov 8 to close at RM22.40. Volumes traded on Nov 8 and Nov 7 respectively were 4.8 million and 5 million shares respectively during this pre-designation period. On Nov 14, news reports confirmed that Datuk Lim of Ho Wah Genting had emerged as a substantial shareholder. Despite this announcement, the designation status on the stock was not removed.

The designation on Nov 12 pulled the share price down by RM5.40 or 24 percent to RM17. The volume traded had dropped to only 10 percent or 59 lots as compared with the previous trading days. The stock continued to drift down to as low as RM16.50 over the next few trading days. On Friday Nov 23 however, when the Second Board index fell 2 percent, Paragon bucked the trend and rose RM1.70 to close at RM18.20, the highest gainer on the Second Board. It took only a volume of 41 lots to achieved that feat.

The Verdict

Does the policy of designating counters actually work? All these episodes point to common conclusions.

Designation only sends the share price down temporarily. Designation does not seem to affect the longer upward trend of the share price.

Designation increases the volatility of the share price. Designation introduces a downward adjustment period but the share price rebounds upwards eventually, leading to larger price ranges. The thin liquidity and the wider bid-ask spreads also increases the volatility of the stock price.

Designation reduces the liquidity of the share substantially. Designation reduces the volume traded to less than 20 percent in the post-designation period as compared with the pre-designation period. The thin volumes actually facilitates manipulation.

Based on the above conclusions, it is hard to defend the policy of designation as being particularly effective in protecting investors interest. The gyrations that follow from an announcement, the increase in volatility, and the sharp fall in liquidity, all adds to hurt investors.

The price movements also suggest that the rule does little to prevent further price rises, curb speculation or manipulation. On the contrary, the sharp fall in liquidity after designation actually makes manipulation easier as a smaller amount of buying can move the price upwards by a wider margin. Designation has ended up facilitating rather than discouraging the manipulation of a stock price by dropping a larger fraction of small investors from the marketplace as compared with the bigger players, as the bigger players would have the margin facilities available to pay upfront upon purchase.

Arbitrary Selection Process

There does not seem to be a hard and fast rule that the KLSE adopts in deciding why Super Enterprise, Sarawak Concrete, and Paragon should be designated, and why Transwater, PWE, MCSB or Repco should not be. The prices on these latter stocks have risen just as aggresively over the last few months, with Transwater going from a low of RM7 to a high of RM107, and PWE from a low of RM14 to a high of RM140 in 1996. Any designation criteria, if there is indeed one, would seem to include these stocks. As a result of the discretionary power given to the KLSE and the arbitrariness in its selection process, designation has introduced more uncertainty than stability to the market.

Hands-off

Sometimes the best policy is none at all. In attempting to help minority interests, the KLSE's policy of designation may have caused more damage than good. In trying to reduce volatility and curb manipulation, designation appeared to have increased volatility and made manipulation even easier. We clearly do not understand the complex market forces well enough to pretend that introducing certain rules will improve market conditions. In such instances, a hands-off policy may be the best rule to follow.

Dr Chua Hak Bin is General Manager at a KLSE-listed company. The opinions expressed are solely his own. This article was also published in Malaysian Business, December 16 1996.

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Super Enterprise		The Kuala Lumpur Stock Exchange (KLSE) has been actively designating several securities, including Paragon, Repco, and Sarawak Concrete, in the last year. The designation imposes trading restrictions on the counters. Specifically, the buyer of the stock must pay cash upfront for the purchase and the seller is required to deliver the share scrips before any sale. This policy measure is intended to curb excessive speculation, reduce price swings, and protect minority investors. The question addressed here is whether designating securities succeeded in achieving these objectives? A straightforward case study analysis of the three episodes suggests that designation appears to do more damage than good. More often that not, the announcement of a designation sends the share price to a free fall for a short period but a sharp rebound occurs quite shortly after that. The volatility of the stocks increases two-fold with such an announcement. Another important effect from the designation is on the liquidity of the stock. The imposition of these trading rules reduces the liquidity of the stock as sellers must have the scrips in hand and contra-buying is not permitted. Surprisingly then, the thinner liquidity actually facilitates the manipulation of a stock. A small volume of buying during the post-designation period can lead to large price jumps, causing even more volatile price behaviour. Not surprisingly then, we observe for the episodes summarised below that dramatic price increases follows even after the designation of a stock. Given the impact such announcements have on the behaviour of the stock price, it is hard to defend the authorities' action as being protective of minority interests or as a dampener on price swings. On the contrary, the episodes suggest that designation increases volatility and reduces liquidity, hurting minority investors in the process.
Sarawak Concrete
Paragon
The Verdict
Arbitrary Selection Process
Hands-off
Main

		Super Enterprise: April 2 Super Enterprise, which was listed with an offer price of RM2.40 in April 1993, had been rising aggresively. On April 1, the share price closed 14.4 percent higher at RM28.25, on rumours that there may be a reverse takeover of the company. The designation on April 2 reined in the share, bringing down the price by 34 percent to RM18.60 at the close, down RM9.65 from the previous day's close. The designation squeezed Super's trading volume from 2.5 million shares to only 0.25 million shares, 10 percent from the previous day. On April 3, Super rebounded up by RM4.40 or 24 percent to close at RM23, with some volatile trading as the price swung from a low of RM17.70 to a high of RM24.90. By April 12 when the curb on Super Enterprise was finally lifted, the share price had climbed to RM28.50, back to where the price was when it was designated. On April 13, the share price soared RM1.50 to reach another record high of RM30. Sarawak Concrete: July 4 On July 4, the KLSE designated Sarawak Concrete after the stock hit limit-up twice on rumours that the company would be getting contracts from the Bakun dam project. The stock had jumped RM6 to end the day at RM16.10 on July 3. The designation had a temporary effect as the share price dipped 13 percent to RM14 in early morning trade on July 4. By late morning however, the stock hit limit-up to RM20.90, and a second limit-up in the afternoon to finish at RM26.40 on closing. Liquidity had shrunk on the counter, and it took only a volume of 133,000 shares to move the counter by RM10.40 or 64 percent. Paragon: November 12 More recently, Paragon became a designated stock with effect from Nov 12 after the stock soared up by RM1.60 on Nov 7, and by another RM5.60 on Nov 8 to close at RM22.40. Volumes traded on Nov 8 and Nov 7 respectively were 4.8 million and 5 million shares respectively during this pre-designation period. On Nov 14, news reports confirmed that Datuk Lim of Ho Wah Genting had emerged as a substantial shareholder. Despite this announcement, the designation status on the stock was not removed. The designation on Nov 12 pulled the share price down by RM5.40 or 24 percent to RM17. The volume traded had dropped to only 10 percent or 59 lots as compared with the previous trading days. The stock continued to drift down to as low as RM16.50 over the next few trading days. On Friday Nov 23 however, when the Second Board index fell 2 percent, Paragon bucked the trend and rose RM1.70 to close at RM18.20, the highest gainer on the Second Board. It took only a volume of 41 lots to achieved that feat. The Verdict Does the policy of designating counters actually work? All these episodes point to common conclusions. Designation only sends the share price down temporarily. Designation does not seem to affect the longer upward trend of the share price. Designation increases the volatility of the share price. Designation introduces a downward adjustment period but the share price rebounds upwards eventually, leading to larger price ranges. The thin liquidity and the wider bid-ask spreads also increases the volatility of the stock price. Designation reduces the liquidity of the share substantially. Designation reduces the volume traded to less than 20 percent in the post-designation period as compared with the pre-designation period. The thin volumes actually facilitates manipulation. Based on the above conclusions, it is hard to defend the policy of designation as being particularly effective in protecting investors interest. The gyrations that follow from an announcement, the increase in volatility, and the sharp fall in liquidity, all adds to hurt investors. The price movements also suggest that the rule does little to prevent further price rises, curb speculation or manipulation. On the contrary, the sharp fall in liquidity after designation actually makes manipulation easier as a smaller amount of buying can move the price upwards by a wider margin. Designation has ended up facilitating rather than discouraging the manipulation of a stock price by dropping a larger fraction of small investors from the marketplace as compared with the bigger players, as the bigger players would have the margin facilities available to pay upfront upon purchase. Arbitrary Selection Process There does not seem to be a hard and fast rule that the KLSE adopts in deciding why Super Enterprise, Sarawak Concrete, and Paragon should be designated, and why Transwater, PWE, MCSB or Repco should not be. The prices on these latter stocks have risen just as aggresively over the last few months, with Transwater going from a low of RM7 to a high of RM107, and PWE from a low of RM14 to a high of RM140 in 1996. Any designation criteria, if there is indeed one, would seem to include these stocks. As a result of the discretionary power given to the KLSE and the arbitrariness in its selection process, designation has introduced more uncertainty than stability to the market. Hands-off Sometimes the best policy is none at all. In attempting to help minority interests, the KLSE's policy of designation may have caused more damage than good. In trying to reduce volatility and curb manipulation, designation appeared to have increased volatility and made manipulation even easier. We clearly do not understand the complex market forces well enough to pretend that introducing certain rules will improve market conditions. In such instances, a hands-off policy may be the best rule to follow. Dr Chua Hak Bin is General Manager at a KLSE-listed company. The opinions expressed are solely his own. This article was also published in Malaysian Business, December 16 1996. ( Go Top ) ( Back To Left Brain )