My thoughts on the Uni-Asia episode 7 comments

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And so it has blown. The blowoff was anticipated even before the event, for an IPO stock (with no post-listing track record) that had quadrupled within three weeks with no apparent fundamental developments. The catalyst for the collapse was widely seen to be trading curbs imposed by various local brokerages, leading some retail investors to question if unfair insider trading by the proprietary house traders who had known of the curbs in advance had led to the subsequent collapse. More than 30 retail investors went down to the Singapore Exchange yesterday to lodge a complaint against stock brokerages that they felt had acted unfairly, something which has not happened for years (not even in the CAO episode, I believe).

My first thought upon hearing about this was a mental flashback to the Horizon Towers episode when en-bloc sellers tried to back out of their apartment sales to HPL as property prices accelerated upwards following their purchase. The parallel that is drawn is that contracts properly drawn up at the time of transaction should be respected and both parties should not have cause for complaint no matter how the market situation develops subsequently. Given the contemptuous attitude held by general Singaporeans towards the relenting en-bloc sellers in the Horizon episode, which is a product of our culture that respects the letter/spirit of the law, my instinct was that the investing public would also not be very sympathetic towards the Uni-Asia protestors. So far, it seems my view is right, judging from the reaction of online forumers.

Second thought was: caveat emptor. As noted above, most traders (except the truly naive) knew the Uni-Asia run-up was a greater fool game, given the high volume, low free float, lack of true fundamental catalysts and amazing price surge. They chose to go in irregardless. As they say, it is horses for courses, and those that played the right way, by controlling their greed and taking profit fast on such stocks, gained big-time, while those that chose to "buy-and-hold", together with those that came in at the edge of the cliff, would be the victims.

As it happens, earlier this week I was reading some investment magazines from the 1990s. Then, the SGX, known as SES at that time, was a tightly-regulated regime. Brokers and dealers who stepped out of line were speedily slapped with hefty fines; listed companies which failed to comply with SES requirements just as quickly got their knuckles rapped; greedy investors out to make a crooked buck from the market were swooped upon and heavily penalised. The result was that the market was sanitised and purged of undesirable speculative elements. Then unlisted, the SES scored top marks for being the most "bull-headed regulator in Asia".

The flip side was that there was also criticism that such emphasis on tight regulation had retarded the development of the capital markets in Singapore as companies found listing requirements and compliance too difficult; an example was Creative Technology (then a shining beacon of local entrepreneurship) heading to Nasdaq to list instead. The same, incidentally, is also being said of the NYSE and its overly-strict Sarbanes-Oxley Act driving companies to list overseas (eg. LSE) instead. At the end of the 1990s, the SGX slowly transitioned to a disclosure-based regime and the caveat emptor principle, in recognition of this fact.

My digression to a narrative on history is to illustrate the inevitable life-cycle development of capital markets in recognition of the fact that tight hand-holding retards growth (it applies in life as well). As a country/market matures, it is natural that the need for strict rules to protect investors should slowly be loosened. Of course, dishonest behaviour should always be punished, but the balance between market regulation and market development is a bit like that between inflation and growth: both are important, but loosen the screws on one too much and you will squeeze the other, probably to the long-term detriment of both. And vice versa.

I have long maintained that SGX cannot both be a regulator and profit-driven public-listed entity and expect the investing public to believe that it has minority investors' interests as its top priority all the time (see "If I were running the SGX"). However, in this case, I do think there are no compelling reasons for it to step in and take drastic action on behalf of the minority investor.

As noted above, people knew before they entered that Uni-Asia was a game of merry-go-round until the music stopped. So the caveat emptor principle holds. Were there any lapses in disclosure? Not as far as we know. As for the brokers and their "unfair" trading curbs, first of all, it should be pointed out that contra trading is a form of broker credit issued to its clients and they have the right to limit it when they perceive credit risk. As for possible unfair house trader front-running (ie. shorting ahead of the trading curb), I doubt one can dig up evidence of deceitful behaviour though if proven, the culprits should be punished under insider trader rules. But the fact remains that whether or not those guys shorted in advance, the stock would still have collapsed once the trading curb became public information, and I doubt those protestors would have got out in time anyway.

And unfortunately, the likely result of the above public spat is that Uni-Asia will drop further next week as SGX comes into the picture (under public pressure) and the fear starts to spread that the stock might be suspended (like the case of Links-Island several years back). That is probably the only definite consequence of this soap opera.