Price surge shows market vulnerable
It would be wrong to charge that the wild price swings which affected a score of Hong Kong stocks at Friday's close were caused by market manipulation - at least of the criminal kind.
As Jake van der Kamp explains on the back page of today's Business section, the fluctuations were caused by benchmarked funds all taking advantage of the stock exchange's new closing auction to juggle their portfolios in line with the rebalancing of MSCI's Hong Kong index.
But the sort of price swings which saw CLP Holdings rise 8per cent in a matter of minutes, and Shangri-La Asia 13 per cent, only to collapse again at Monday's open (see charts below) serve as a reminder that all markets, even the most sophisticated, are vulnerable to damaging distortions and sharp practice.
True, the advent of electronic trading has rid markets of many of the worst abuses of the bad old days. Speaking yesterday at a conference in Hong Kong organised by traders' message standard FIX Protocol, Nick Leeson recalled his time as a dealer on the open outcry floor of the Singapore International Monetary Exchange. 'Market manipulation was rife,' he said.
And he ought to know. Mr Leeson was the 27-year old rogue trader who destroyed Britain's venerable Barings Bank by running up hidden losses of GBP860 million (then worth HK$10.6 billion) attempting to drive up the Japanese stock market following the 1995 Kobe earthquake.
Manipulation was not confined to Asia. One Chicago futures firm hired linebackers from local American football teams to physically block rival brokers from the trading pits so it could front run their orders.
The notorious Bank of Credit and Commerce International went even further, combining market manipulation and money laundering through a technique known as mirror trading. It would sell in volume through one account to drive the price down, wait for trend-followers to jump on the move, then buy back through another account. With deft timing it could not only successfully launder drug money, but make a profit doing so.
The introduction of electronic trading may have cut down abuses, but as Citigroup's Euro13 billion (HK$158.19 billion) European government bond trading scandal in 2004 and Societe Generale's Euro5 billion rogue trader loss this year prove, it has not eliminated them.
In fact, technology is creating new opportunities for dodgy dealing. Investors and regulators at yesterday's conference were both concerned about potential problems with a recent innovation known as 'dark pools', although for different reasons.
Dark pools are opaque wells of off-exchange liquidity created by funds and brokers transacting large block deals in private away from recognised public markets. At least eight are operating in Asia, with as many more preparing to open.
Institutions like dark pools because the secrecy allows them to execute large trades without broadcasting their intentions. But they also fret that that same opacity leaves them vulnerable to price manipulation or 'gaming' by unscrupulous counterparties.
Regulators have a different concern. At the same conference, Securities and Futures Commission chief executive Martin Wheatley warned that alternative electronic trading channels like dark pools could disrupt market price discovery, with big funds and investment banks paying one price for stocks and ordinary investors paying another. 'The more prices are formed away from the exchange, the more we are concerned that retail investors are not getting the best price,' he said.
Such price splitting could become a huge problem in the future, because it has the potential to destroy ordinary investors' trust in the market. That would prove far more damaging than a brief spike in closing prices.
