A recent scandal concerning unusual trading in the stock market is a wake-up call for authorities and brokers to come up with measures to plug loopholes in the capital market.
Luckily, the incident did not happen with a major stock with large market capitalisation or the damage would have amplified.
The Stock Exchange of Thailand suspended trading in shares of More Return Plc (MORE), listed on the Market for Alternative Investment (MAI), on Nov 14-18 after it noticed unusual trades on Nov 10 when the shares opened at 2.9 baht apiece, up 4.3% from the previous session.
They then quickly fell to a floor price of 1.95 baht. There were buy orders for 1.5 billion shares at 2.9 baht per share, with huge numbers of the shares being placed for sale at the same price, representing a combined transaction value of 7.14 billion baht.
The price of MORE shares continued to fall the next day to 1.37 baht apiece, prompting the SET to notify investors to trade with caution while requiring brokers to report any unusual trading in the stock.
SET president Pakorn Peetathawatchai should be applauded for taking action promptly in response to the unusual trading. He sought cooperation from police, the Anti-Money Laundering Office (Amlo) and the Association of Securities Companies to probe the alleged fraud and secured a freeze in 34 items of assets related to MORE stocks worth 5.37 billion baht. The freeze lasts for 90 days.
However, the regulator and brokers need effective measures to fix loopholes and restore investor confidence. The SET has a total market capitalisation of about 20 trillion baht, while MORE has a total market capitalisation of around 10 billion baht. With such small market capitalisation, damage from the MORE case is limited. Imagine how much bigger the impact would be if such ill-intended transactions happened with stocks with a much bigger size.
Still, the MORE case has resulted in criticism of the securities companies and stock market regulations which appear unable to prevent such frauds from happening. Analysts cited existing loopholes as a major factor allowing companies to break the securities law.
Brokers can approve customer limits without enough checks on their credit. With cash accounts, security companies also offer investors credit to buy shares first let and pay later; brokers will set trading value limits among clients depending on their financial status, collateral assets, and debt repayment background.
Investors can trade with a value that is higher than collateral (cash or stocks) they have in the account by putting up only 15-20% of the margin and paying over the next two days.
In the case of MORE, it is likely an investor used cash accounts that he has with several brokers to buy 1.5 billion shares.
When the orders between buy and sell automatically match, he had no need to pay for the orders immediately.
Finally, he defaulted on payment which was due two days later but several brokers which placed selling orders for clients have to pay for their clients for matched orders. Authorities are investigating whether the buyer and sellers of the shares are part of the same group and conspired to get money from brokers.
As the SET's goal is to boost total market capitalisation to 30 trillion baht, or 150% of GDP, suh regulatory loopholes must be fixed to keep investor confidence.
