Trader banned from floor

A STOCK exchange trader has been banned from the floor and rigorous restrictions imposed on her employer for helping other brokers to cheat their clients.

The action brings to four the number of brokerages publicly implicated in dishonest trading during the past three years.

Market rumour is that the investigative net is due to home in on two more major brokerages which are the target of action on market abuse.

Geraldine Wong Pui-ching of K S Kam & Co has been banned from the floor under Section 39 of the Securities Ordinance while a series of limits have been imposed on how her boss, K S Kam, trading as Kam & Co, can do business.

Restrictions include: A ban on cash business.

A ban on taking clients employed by other brokerages without the written permission of the other brokerage.

A bar on accounts being operated by anyone other than the account holder without written permission and a bar on accepting orders specifying a particular brokerage as counter-party without a written request.

Traders are supposed to have permission from their employers before opening an account at another brokerage.

Rat-trading is done when a broker receives, for instance, a buy order on a stock which then soars in value during the day.

Dishonest brokers will use another firm to buy a second batch of shares and give the client the high-priced shares while trading off the lots bought at the low price for personal gain.

The same thing can be done in reverse on a falling market.

Big firms will normally have compliance regimes which will pick up any rat-trading deals and the Automatic Order Matching and Execution System (AMS) has made detection easier.

Rat-trading in major firms is normally done with the connivance of floor dealers, as was the case at James Capel, which earlier this year sacked almost every floor trader employed by it in Hong Kong after uncovering rat-trading.

K S Kam has been told full details must be given to the SFC by the end of the next working day of every sale and purchase not conducted through the AMS.

The action stops short of suspending the firm, possibly because suspensions are subject to an appeal process while restrictions can be done by executive action.

The Securities and Futures Commission (SFC) said the inquiry started after the discovery of nominee accounts in the course of a routine inspection of K S Kam & Co.

These accounts were established and maintained by certain floor traders employed by other stock exchange members in the names of relatives and friends.

Market sources believed otherwise.

'The market's been abuzz with rat-trading rumours for months,' one source said.

'How could they have picked up false accounts in a routine inspection? 'First, they nicked all the unauthorised dealers - now it is rat-traders.' A series of non-compliance has continued since the uncovering of deals without proper client identification by Great Honest in 1993 - a practice often linked to rat-trading.

Standard Chartered Securities was censured in June last year for fixing floats, rat-trading and lying to regulators, and James Capel acted against its rat-traders in February.

Market rumours say the SFC and exchange will be acting against two further brokerages. At least one, and probably both of these, is a major firm.

SFC enforcement director Gerard McMahon said: 'Our intermediaries supervision department has an on-going audit of licensed persons. This is a remedial action.' He refused to comment further.

Exchange compliance director Paul Phenix refused to comment directly on the case.

'The exchange introduced a code of practice in November 1993,' he said.

'People are expected to follow it.' Mr Phenix said action against rat-traders and other market abusers was in the long-term interest of the exchange.

'In our recent survey of small investors, one of the findings was a discomfort about being treated unfairly,' he said.