SFC is angling for minnows while big fish go free

Regulator is focusing on small-scale stock price manipulation while turning a blind eye when big investment banks do it

PUBLISHED : Wednesday, 24 August, 2016, 5:28pm
UPDATED : Wednesday, 24 August, 2016, 11:00pm

The Securities and Futures Commission has suspended the licence of Mr Ku Yuen-leung for engaging in manipulative activities. ... an SFC investigation found that between 5 and 26 November 2010, Ku created a false or misleading appearance in the market with respect to the shares of Agricultural Bank of China by placing large-sized bid orders for ABC shares to drive up the prices of five related call warrants.

All the bid orders in ABC shares which were cancelled immediately after Ku sold the related warrants at inflated prices for profit were apparently not driven by genuine demand but intended to influence the market making decision of their liquidity providers.

Ku made a gross profit of $15,500 from trading the warrants.

SFC news release,

August 23

Here we have the SFC out minnow-fishing again. The “offence” occurred six years ago and the culprit made only HK$15,500 for all his considerable trouble in playing silly fools with the stock.

Meanwhile, big investment banks encounter no difficulties in making hundreds of times as much money from offering their clients inside information on selective placements and from manipulating share prices through so-called “greenshoe” market support. The SFC, however, does not believe in whaling.

Notice the press release’s mention of “large-sized bid orders”. Since when does any stockbroker tell the market how big he is when he puts up his number?

And what’s this about liquidity providers? Have we created a special class of stockbroker who is allowed to play silly fools with a share price while those with whom he deals are not? What a wonderful principle we have here: all are created equal but some are created more equal than others.

I have no real objection to market support exercises. It’s just that the SFC prohibits small market participants from indulging in them while quietly looking the other way when big ones do so.

It used to be standard practice for any small new issue when I started in the trade. Every now and then the controlling shareholder would send the price up for a day or two amid a flurry of trading – “Hi, folks, I’m still here and my sugar daddy keeps me going. I’m a living, bouncing, healthy stock, I am.”

Would anyone really have had it otherwise? Imagine proud parents turning to the newborn baby in the crib and saying, “Well, junior, you’re on your own now. Hope it works for you.”

And yet that’s the way our regulators insist it must now be. The sad results of this enforced neglect are apparent in our moribund Growth Enterprise Market.

That’s the rough and tumble of the market. Let it be.

Buying and selling in the market is not always a simple matter of genuine demand. I worked for Morgan Stanley for a spell and recall one lacklustre day in Tokyo when the chief trader bellowed out to the entire dealing room that he was a buyer of a bellwether warrant in the market. His underlings scrambled for their phones. A minute or two later he bellowed that he was a seller of the warrant.

I now ask you, was he ever a serious investor in the thing?

Of course not. All he wanted to do was ask the market in what direction it was moving. That’s how one asks.

And then there is always the grand story of all Britain waiting with bated breath in the summer of 1815 for news from the continent of whether Napoleon Bonaparte could be stopped in his surprise comeback to power.

Only Nathan Rothschild had the foresight to send a runner to Belgium, equipped with a basket of homing pigeons. He had the news of Waterloo in his hand almost before the official despatch left the Duke of Wellington’s.

Next morning he appeared at the stock exchange in a foul temper, dressed in black. “Oh, best watch it,” said the punters. “The old man has had some bad news”. And they sold heavily.

Rothschild meanwhile had his people quietly pick up the stock they sold and cleaned up a day or two later when the official courier arrived in London to proclaim the victory.

That’s the rough and tumble of the market. Let it be.