I would like to take issue with the article 'Merrill Lynch joins chorus of criticism at intervention' (South China Morning Post, August 25).
Every capital market must be regulated to ensure transparency and fair play. Rule-making for any market depends on many parameters: market size, liquidity and its links to other derivative and currency markets. A small capital inflow having a negligible effect on a bourse with an average daily dollar volume of 20 billion could become a tsunami to another which only trades a few hundred million daily.
Regardless of the specifics of each market, practices such as front-running or insider trading, while outlawed, are universally accepted. Manipulation of a stock's daily closing price just before an option expiration is considered criminal. However the Merrill Lynch folks want to rationalise it. The same principle can be applied to the manipulation of Hang Seng Index futures, using the Hong Kong currency market as a wedge.
The paradox is the smaller the market, the broader should be the interpretation of rules and regulation of a local Securities and Exchange Commission (SEC), which is charged with the responsibility of maintaining an orderly market. Orthodoxy of free-market beliefs, so typical of some of the critics, is manifested in a superficial understanding of the public policy actions needed to safeguard the spirit embodied in a free market. In the present case, the illegal manipulation of a linked currency market is beyond the charter of the Hong Kong's SEC. In the absence of a statute to prosecute the offenders, the Financial Secretary made a difficult but, on balance, correct decision to intervene.
How legitimate are the complaints of some market analysts about government intervention ruining the market? The United States Federal Reserve periodically resets its federal funds rate and discount rate, but it does not stop people from trading in interest rate futures. People still trade in deutschemarks even if Hans Tietmeyer of Bundesbank buys and sells deutschemarks or US dollars from time to time.
Every good speculator takes exogenous market events such as raised margin requirements or the imposition of additional circuit breakers as a given. We should have no sympathy for market bullies turning into whiners because somebody takes away their stacked deck and makes them compete on a level playing field for a change.