Friday, May 12, 2006

An Open Letter To Securities Commission
Need To Rethink "Designated Securities"

Malaysia's Securities Commission has designated Iris Corp due to the stock's excessive speculation and unusual trading patterns. Iris Corp traded as low as 8.5 sen in September 2005. Yesterday, the share price hit RM1.36 or a 1,500% increase. When a counter is designated, trading in the counter will continue but buyers will be required to make payment upfront before buying the shares, and there must be a free balance of securities before selling. In addition, the SC and Bursa Malaysia would be requiring the company to make further disclosures to allow for more informed decision making by investors.

Iris is involved in covert security for national type documents embedded in microchip. The company was listed at 30 sen in 2002 and now has a market cap of RM1.1 billion.

I am all for designating securities, but there needs to be strict rules and procedures in enforcing it. To allow for the SC room to determine when and which one to designate only opens up room for "bad things to happen". While I am not implying bribery or corruption happens, when there "room" to talk, there is room to manouvere by company management. We must eliminate the need to be judged unfairly, and eliminate vicious rumours. Why open yourself to room for query?

To designate a security can wipe hundreds of millions from a share's market cap, hence the rules must be visible and fair to investors who have bought, and those who have decided not to buy - now, holders of these shares are at the mercy of the SC, and buyers who bought yesterday would have be unfairly treated, don't you think!!

Some proposed rules for designating a security:

1) A stock should be designated if it has hit the 30% limit up twice out of three trading sessions. In KLSE, a stock can only move up 30% in one trading session. The rule would not apply to shares whose prices are below 30 sen. The rules would also not apply to the first 3 trading days of an IPO. If a share already moves up two times in limit up, the share price effectively could be:
1.3 x 1.3 = 69% gain.
Anything more than that within 2 trading days is certainly excessive.

2) A stock should be designated if it has risen by more than 100% in 5 trading days. This should be obvious.

3) A stock should be designated if it has risen by 200% in a month. Again, pretty obvious - a stock that has tripled within a month means too much inherent speculation is still apparent.

4) Above and beyond those 3 rules above, the SC would then have the liberty to step in. This is to prevent syndicates who try to "navigate around the above rules".

5) To be released from designation, it is after a fixed 2 week period.


Rationale:
a) These rules will be administered strictly, hence investors can be assured of the prevailing rules and goalposts (and not have these bloody goalposts shifted every now and then, sometimes not even knowing if the goalposts even exist, not knowing how much is excessive speculation each time in the opinion of the SC).
b) If the stock really has gained enormously in fundamentals (projects, prospects or profitability), a designation WOULD NOT and SHOULD NOT stop genuine buying. The rules are meant to rein in excessive speculation.
c) The proposed rules have already given ample room for stocks to move up. The lifting of designation is also fixed, so again no room for hanky panky.
d) Removes monitoring by SC, it is an automatic designation, no room for questionable practices. The SC would only step in if certain companies try to navigate above and beyond the proposed rules.

If we were to implement these rules, Iris Corp would have been designated a long time back. Investors would have known the price levels to avoid entering as they know Iris would have been designated if they bought close to certain price levels. The benefits of knowing when a stock will be designated is too high, .... even to get the SC to delay designation by one trading session would yield an enormous edge for those who knew. That suspicion has to be eliminated completely.

3 comments:

Moola said...

Sal,

Great write. Hope you do not mind but I made a link to your posting in my blog.

Cheers

Salvatore_Dali said...

Moola,

TY for yr kind comments..

cheers,

dali

swifz said...

Another way is to limit the trading hours of speculative counters...let say for 1 seesion per day. This may check the speed of rise.

my 2 cents