Monitor

'If they are successful, the culprits get more shares than they are entitled to and can reap extra profit if share prices surge.'

SCMP, March 30

Iwish I could fathom the thinking of people with an over-developed sense of moral righteousness but I am always surprised at how they see crime where I see only evidence that someone has used brains to take advantage of opportunity.

The news here, of course, is that the police have arrested 18 people for submitting multiple applications for initial public offerings on the stock market when the junk food appetite for big mainland listings was at its height last year.

These people exploited an anomaly in the ID card numbering of refund cheques to make their multiple applications, for which they have now been branded as 'culprits'. They exceeded what they were 'entitled to' and, worst of all, they stood to 'reap extra profit', a truly heinous offence. The words 'scam' and 'fraudulent' also featured in our report of this incident. Yes indeed, hangin's too good for 'em.

I have a different perspective. I applaud them for a neat piece of clever thinking. My view is that the cops could have put their time and resources to better use in catching some real crooks than in hunting headlines for support of odd notions of financial rectitude.

Let us make it clear in the first place that these 'culprits' who stood to make extra profit also stood to make extra loss. They did not take money. They only sought a larger allocation of shares than the stock exchange wanted them to take. This did not change their risk/reward prospects.

Share prices, let us remember, can go down as well as up.

You may say that there was very little chance of them going down at the time and this is probably true. But I also keenly remember the euphoria 20 years ago when the futures were at a huge premium to the cash and share prices were soaring because Li Ka-shing was reportedly about to buy Hongkong Land. It didn't happen. Instead there was a crash on Wall Street and Hong Kong followed suit.

Let me tell you that the whites of fear then showed in the eyes of the punters who were certain that they had had a sure thing. They were staring wipe-out in the face. Small chance of loss is not the same as no chance at all and the shock is enormous when it comes up.

But let us also consider how it came about that our 'culprits' were induced to attempt their 'scam'.

They would not even have considered it if the market had been allowed to follow its natural inclinations. Markets are by nature egalitarian. In such matters as new issue share allocations they work best when they work on the principle of all are equal.

This means that if there are one million new shares to be issued but applications for two million shares then everyone who has applied gets one share for every two shares for which they applied. If board lot size gets in the way, the natural practice is to revert to the lucky draw. One out of every two applications gets the full amount applied for, the other none at all.

Take note that making multiple applications under this natural allocation system makes no sense. You cannot improve your chances by filling out 10 application forms instead of one. There is no restriction on the size of application and for every application the odds are one in two.

But the powers that be in our government-controlled stock exchange do not like the principle of all are equal. They favour the Animal Farm principle - All are equal but some are more equal than others.

They approve of distinctions between institutional and retail applicants and they approve of different ratios of allocation for different classes of investor and for different sizes of application.

In so doing they immediately made it worthwhile for some applicants to try to undermine the complicated allocation system and improve their chances through multiple applications.

I now ask you the relevant questions. How many people were killed when they did so? Were the shattered dismembered limbs of innocent bystanders scattered at the scene of this crime? Was anyone raped? Was anyone clubbed and sent to hospital for weeks? Was anyone held up at knife-point and robbed? Was anyone even pickpocketed?

Oh, I see, none of these things happened. What was the big crime then?

As I understand it, all that happened is that some speculators on these new issues (don't fool yourself. They were all speculators) got very slightly worse odds in the lucky draw of taking their chances on the market than other speculators who discovered a way of getting around the multiple allocation ban.

This embarrassed the stock exchange authorities, which is an utterly repellent and abhorrent crime. Thus call in the cops. Bung the felons into prison. We're all for truth and righteousness and organic rice here.

Gimme a break.