Trading Error Or Manipulation On DRB?

Well, almost everyone on the streets are talking about the DRB last minute drop. Many shouting that it is manipulation, while the paper has come out to say its a trading error. So, what is the verdict?




Written by Chong Jin Hun / The Edge
Tuesday, 26 July 2011 11:54

KUALA LUMPUR: DRB-Hicom Bhd shares fell 14% or 33 sen to close at RM1.95 yesterday, making the counter the biggest loser on the local bourse in what was believed to be a trade error by a bank-backed brokerage.

Sources said the substantial decline in the stock’s price within 10 minutes prior to the close of trading happened when transaction instructions for three million DRB-Hicom shares by an institutional investor were keyed in wrongly by the brokerage. “It is believed that institutional investors had wanted to buy the shares (at the lower price of RM1.95). But the transaction was keyed in as a sell order instead,” the source told The Edge Financial Daily yesterday.

The error, which occurred at about 4.50pm, had seen the three million shares transacted at RM1.95 until the closing bell. Prior to this at 4.48pm, the stock had changed hands at RM2.28, unchanged for the day.

The shares rose to an intra-day high of RM2.30 before closing at RM1.95. Year to date, the stock is only up 0.52% this year.

The diversified conglomerate, which has a market capitalisation of RM3.77 billion, has interests in automotive manufacturing and distribution, property development and construction, among others. DRB-Hicom made news early this month when it acquired a controlling 32.21% stake in Pos Malaysia Bhd from Khazanah Nasional Bhd for RM622.8 million or RM3.60 a share. The transaction made it the single largest shareholder of Pos Malaysia.

DRB-Hicom group managing director Datuk Seri Mohd Khamil Jamil had said in a statement then that both DRB-Hicom and Pos Malaysia complemented each other strategically.

According to Khamil, DRB-Hicom will help grow Pos Malaysia’s courier, retail and logistics operations. At the same time, the acquirer will also be able to leverage on its associate’s distribution channel.
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If a broker wanted to close it at RM1.95 so that some call warrant will expire worthless, they would have had to do it for 5 days. You may be able to carry that out if the trading volume was not so liquid. Then we have to assume that it was the same broker making the trade (or trading error), but we do not have final confirmation yet. We still do not know which house made that trading error.

Say, they really wanted it to close RM2.00 or below everyday from RM2.30 level. After day 1, investors would wise up and queue all the way from RM1.95 to RM2.05 in case the "player" starts to sell big at the end of the day again.

Mind you, they probably got RM15m from the issuance of the call warrant and maybe another RM5m from trading the paper. They needed to take out 3m to hit RM1.95, and promptly the next day the share went back to RM2.24. So, assuming a 20 sen average loss on 3m = RM600,000. However, if they did attempt to do it again, I bet you they would have to take out a much heftier volume as vultures will queue to buy, so day 2 may see them having to take out 8m and the amount will rise again for subsequent days.

Even so, some may say, they may need to spend only RM7m-8m in total to keep it closing below RM2.00 for 5 days. That would wipe out a lot of their issuance gains. If you calculate properly and let the call warrant expire around RM2.30, the "loss" is minimal. Having said that, most investors would be totally misguided to think that OSK just issues the call warrants and has a one-way bet. Seriously, THEY DON'T CARE whether it closes in the money or out of the money as they are properly hedged all the time (I hope, otherwise they are just a cowboy outfit).

All brokers should be smart enough I hope, you'd think they would not know that they'd be flouting the law or tempting fate if they did this for 5 days straight? You think they would risk being heavily fined, censured or even suspended from issuing call warrants in the future, .... or maybe we sometimes give brokers more credit for their intelligence than they deserve, maybe they were just really stupid?!



One note of advice to SC/Bursa, make all warrants, call or otherwise, final settlement price not to be determined by the last 5 days closing prices but the average weighted price over 5 days - the scope for manipulation would be greatly reduced.

I will swing towards it being an intent to manipulate because WHO IN THEIR RIGHT MIND WOULD PUT A 3m BUY ORDER or SELL ORDER ON DRB HICOM given the current normal daily trading volume of the stock WITH 15 MINUTES OF TRADING LEFT???? Maybe because the egg has now been splattered over everyone that the intent has to stop. If there was no outcry, maybe we will see even more of these "trading errors".

However, having said all that, since the affected call warrant is subjected to the "error" in closing at RM1.95, that means 20% of the settlement price is also diminished substantially if it was originally closer to RM2.30. If the said broker admitted it to be an error, then that broker MUST COMPENSATE all the affected call warrants by the "missing quantum" in the calculation.

IF the broker issuing the call warrant IS THE SAME HOUSE where the actual trading error was also done - then its understandable why so many may be up in arms over possible collusion or intent to deceive. Till now, we don't have actual confirmation of which house made the error.

So, you have a call warrant expiring for one house, and somehow the first day of calculation of settlement price for the call warrant, you have a trading error by some house, the size of the trading error was enormous relative to normal, considering with just 15 minutes to end of trading ... what are the plausible explanations... yes, you could have a litany of legal minds arguing tons of possibilities ... but remember Occan's Razor, "the simplest explanation is most likely the correct one."