Jake's View

Transparency may not always be a virtue

Full disclosure of company accounts the right thing to do but it is different story when it comes to stock market dealings

PUBLISHED : Tuesday, 26 February, 2013, 12:00am
UPDATED : Tuesday, 26 February, 2013, 5:03am

"We would not like to see Hong Kong falling behind the other markets while developing these new trading 'tools' but at the same time we want to protect the transparency of our market."

Carlson Tong Ka-shing
chairman, Securities and Futures Commission
SCMP, Feb 25


I have added the word "tools" in the quote above because I think it was what Tong meant to say rather than the "pools" we quoted him as saying.

I, too, can speak Investibabble and the sentence doesn't run quite right in Investibabble with the word "pools".

In other respects, however, the mistake is Tong's and it is a typical one for a career accountant to make.

Accountants love transparency. It means much more detail in published corporate accounts and much more frequent publication of them, all of which creates more work for accountants.

Have you ever known a lawyer who truly wanted the law to be simpler?

Lawyers are all for it until clients start thinking of representing themselves and then we are told in fulsome lectures how unwise this would be. It is much the same way with accountants.

I fully accept that it may be unwise for people to represent themselves in court and I fully accept that more transparency in corporate accounts is of great value to investors. But this does not give you the enthusiasm with which lawyers speak for professional representation and accountants for greater transparency. Don't stand between professionals and their income.

Tong has devoted much of his accountancy career to initial public offerings as well as other stock exchange listing concerns and, once again, I think he is quite right to emphasise the importance of full disclosure in these areas.

I only wish he might accompany this with the full disclosure that the SFC's writ does not run far with the mainland listings that now dominate our stock market, particularly in the post-listing capers of these stocks.

Then again, I would be asking this of a man whose loyalty to the SFC is so unquestioning that he still tries to justify hitting investors with a special levy after it has already built up the SFC's war chest to HK$7.5 billion, more than eight years' worth of running costs.

This aside, however, my point is that the transparency we rightly consider a virtue in both corporate accounts and disclosures to the stock exchange is not necessarily a virtue in dealings on the market.

If you don't believe me, just look at the flock of vultures perched over the market. At latest count, the exchange had 534 "market participants", the polite term for seat holders of four previous stock exchanges, who had to be given seats in the merged exchange in 1986.

Of this number, I will concede that perhaps 50 are legitimate stockbrokers with real client businesses. The rest just sit there, vulture-eyed, waiting for one of the big players to make a move that they can front-run.

And, of course, the big players don't like it. They have responsibilities to their clients, which are not met if every time they work a large order through the market, they have the vultures descending on them.

So they move their trading to "dark pool" platforms where they can trade between themselves out of sight from the vultures. It's perfectly understandable and the exchange's own fault for continuing to host vultures.

But the exchange has no cause for complaint anyway. The big boys still clear their trades through the exchange at the end of the day. They have to do this to establish legal ownership to any securities bought on the dark pools.

Get it straight. The howls of protest you hear about "dark pools" are not howls of moral outrage but of vultures denied prey. It offends them that others should have some right to privacy in their finances.

More to the point, people don't show their hands to the other players in a card game and they don't open negotiations with the sellers of a stock by telling them their real price limits.

You have it wrong, Mr Tong. Be transparent with information in a company's accounts but be guarded with it when dealing in the company's shares. Sometimes transparency is not a virtue.