AS yesterday's headline in Business Post showed, rat-trading is alive and well, although the Securities and Futures Commission (SFC) and the stock exchange are attempting to stamp it out. The trouble is brokers do not seem to take it seriously enough. On Tuesday, the SFC said it suspended three floor traders from representing their employers on the trading hall of the stock exchange because it suspected them of rat-trading. In its latest annual report the SFC says: 'Our mission is to promote user confidence in the efficiency and fairness of Hong Kong's securities and futures markets so as to support their continued development.' In its corporate strategic objectives, it says it will strive to 'develop and maintain effective compliance and enforcement supported by adequate statutory powers'. It would also strive 'to ensure responsible and effective self-regulation by market bodies'. In the election manifesto of Chim Pui-chung in August this year, Mr Chim called for an amnesty for rat-traders. This is like the Society of Accountants calling for an amnesty for embezzlers or the Independent Commission Against Corruption calling for a softer line on bribe-takers. Rat-trading involves profiting from share-price differentials at the client's expense. Typically, a floor trader receives a buy order at a set price from his dealing room but, believing the price will fall, waits and buys at a lower price through his account with another broker. He then sells the order back at the originally quoted price to his dealing room, and pockets the price difference. According to Hong Kong legend, a few brokerages do not pay their traders - instead, traders pay their brokerages for the privilege of gaining access to the market and client orders. Regardless of whether this is true, or ever was true, rat-trading threatens the integrity of the market. There is no point in Hong Kong trumpeting the size and liquidity of the share market, its unrivalled access to China, its blue-chip companies and the dynamics powering the territory's growth if some traders are seen to be unethical. The SFC should consider amending the SFC Ordinance to make it far tougher for rat-traders to survive. It could consider far harsher penalties for offenders. And it could consider telling financial institutions that their access to the stock exchange trading floor will be suspended if any of their traders are caught in rat-trading. That would encourage brokers to scrutinise their traders' activities more closely. This is not to say that the practice is widespread, and it is highly unlikely that big US and European players with presences in Hong Kong are guilty. They come from countries with regulators who take a dim view of this sort of thing. In one of the most publicised instances, a manager of floor-trading for Standard Chartered Securities reported his own trading malpractices to his superiors, who did nothing to halt him. So he went on and split the profits with the floor traders under his command. His ultimate punishment was a three-month suspension of his trading licence last year. Hardly Devil's Island stuff. As Business Post pointed out last November, punishment for such offences should meet the crime. In November 1994, the Stock Exchange of Thailand (SET) imposed a HK$12 million fine to one of its member for an error which turned a sales order for 2,000 shares into an order to sell 200 million. The SET explained the fine as an appropriate response for the damage done to the system. It probably helped to focus the minds of SET members as well. Something in the line of stiffer penalties would help to focus the minds of Hong Kong exchange members if rat trading means they have to pay heavy fines. More than a year ago, the SFC said automated share dealing would kill off rat-trading. It was too optimistic. This year, a trading-floor time lag did not end when auto-matching stopped - instead, brokers had 10 minutes for manual execution after auto-matching. This is like separating front-office and back-office functions four days a week, but allowing one person to have access to both on the fifth day. A successful share market is powered by trust between clients and brokers. If tough penalties for infringements may be the only way to instil trust between clients and brokers, Legco should start drafting a suitable amendment today.