Monday, May 28, 2007

Its Elementary, Watson

The Singapore index plunged 400 points last Friday after a mistake which allowed a broker from DMG & Partners Securities to key in an order to sell 400,000 DBS shares at S$0.27. DBS' last traded price was S$24.50. The broker later said that he actually wanted to sell the warrants and not the parent company shares.

Any one who has been a dealer will confess that mistakes are part and parcel of the job. However, together with hordes of others, I am very shocked that the trading system in Singapore would allow such trades to get past the systems. A good trading system would have identified this as a human error, even the yahoo email will ask "are you sure you want to delete these spam files?". I find it very disturbing that SGX do not have in place these "circuit-breakers". There must be a limit in the volume to be entered and also a control on the price. The usual rule of thumb is that buys and sells cannot be more than 30% the previous day's closing price. However that can be allowed to go +- 50% if the exchange so desired. The usual rule of thumb is that for issues/shares or warrants trading below 50 cents, the rule does not apply. Even a +- 50% circuit breaker would have eliminated such human error. Its a bit embarrassing no matter how you cut it. Not for the broker but for SGX.

Apparently the SGX trading system only recognises the client's financial limit when deciding if a trade can go through - it does not recognise the price keyed in. For the 400,000 some 187,000 were matched - the buyer probably thought this was better than the lottery. In the end, all the trades were able to be canceled.

The ramifications of this are wide ranging. This is unacceptable, all trading systems, even KLSE, have proper limits and checks to reduce human error. The present SGX system is flawed. SGX should thank their lucky stars that this was highlighted with such a minor mistake. A bigger, well calculated plan would see somebody accumulating loads of warrants, options or futures and doing havoc on closing day price for certain shares, especially illiquid ones.


simon_alibaba said...

ai yah how come the kiasu, kiasi SGX overlook such important circuit
- breaker

this time YUS baby will say hah : Dali,one up on SGX.

crytic_coder said...

Bursa Malaysia must also look into their derivatives trading system too.In the morning of 30 May 2007, there was a plunge in the spot month ( May ) futures to 1306.5. That trade ( and a few others ) were cancelled later in the morning by Bursa, stating a computer glitch. How would the investor who bought at 1306.5 feel when his trade was cancelled , especially when he has taken the opposite trade to realise his profits ?

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