City's out-of-touch securities watchdog simply lost in market

PUBLISHED : Sunday, 06 June, 2010, 12:00am
UPDATED : Sunday, 06 June, 2010, 12:00am

Time for another instalment of the SFC Follies as our securities regulators continue to demonstrate how out of touch they are with the real world.

Case 1 involves the Securities and Futures Commission nabbing another hardened criminal who wreaked havoc on society and is now to pay for his misdeeds with a suspended jail sentence plus a fine, costs and revoking of his licence. Leung Kin-bon's offence was false trading last year in Takson Holdings, one of the penny stocks that increasingly define our stock exchange. On 15 separate occasions he played silly fools with the closing price of the stock, pushing it up with buy orders above market level.

And here's the punch line for you - the total amount of money involved in this heinous scam was HK$4,028.32.

Let's write that out cheque fashion - Hong Kong dollars four thousand and twenty-eight and cents thirty-two. No, I'm not kidding. I didn't drop three zeros. This wasn't in millions. This was the actual sum ... an average of HK$287.74 per transaction.

And, no, in case you ask, it does not appear that this unimaginably clever manipulation fooled anyone into thinking that Takson would be the stock of the month. You would have to be a securities regulator to think that.

Nor, apparently, did Leung have an exit strategy from his caper. He held on to the stock.

I repeat, a total value of barely HK$4,000 over 15 separate purchases and this has the SFC out whoop-hollering in triumph at the latest scalp to hang on its tepee pole. You couldn't make it up.

Case 2 - The SFC fines three dealing desk jockeys at UBS a total of HK$1.8 million for possibly misleading the market through wash sales (regulatorish for transactions where buyer and seller are the same person).

What happened here was that a client wanted to transfer part of his portfolio from UBS to another bank, which could have been done the simple way through a clearing house transfer. Instead it was done the complicated way through transactions on the exchange with the other bank.

Now, I'm going to pull rank here. I spent almost 20 years in the stockbroking business and this looks to me like a case of misleading the client, not the market.

I could be wrong about this, of course, but a transaction like this suggests that someone was looking for a bigger fee than could be had from a simple transfer.

Put that trade through the market with two lots of commission on either side plus maybe some forex, an administration charge and a few other stings and all of a sudden it becomes a piece of business that desk jockeys might smack their lips about. They wouldn't drool for an itty-bit transfer fee.

I'm not saying that this is what actually happened but it is certainly where I would look first if I were a regulator. Misleading the market doesn't do it for me as the theme of this story.

Let's put it to the acid test. Will UBS sack these people for making some extra money for the house?

Case 3 - Hong Kong investors who buy certain complex derivative products will be entitled to a five-day cooling-off period, during which they can change their mind and get a refund minus an administration fee and any price difference due to a change in the market price.

Question: Who determines the market price in a complex derivative product?

Answer: The people who sold it to you in the first place, of course.

Question: Can I follow the trading in it on some website or market screen?

Answer: Nope.

Question: Why not?

Answer: Because that might create an efficient market with tight pricing. Market-makers in derivatives don't like tight pricing. They like wide pricing, particularly with retail accounts like yours.

Question: How wide?

Answer: W-i-i-i-i-i-i-d-e.

Question: Do you mean if I bought it from the market-maker at HK$100 and I then changed my mind, I might only get HK$90 back?

Answer: You could be so lucky. Don't look a gift horse in the teeth.

Question: But isn't that a rip-off?

Answer: Yep.

Question: And I could get ripped off like that even if the market hasn't gone down?

Answer: There is no market but what the market-maker quotes. If you don't believe him when he quotes you a bid/offer, then lift his offer and buy some more from him. That's how you keep market-makers honest.

Question: Why doesn't the SFC tell me that?

Answer: Because the SFC doesn't know how financial markets work.


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