Feb 10, 2014

    It behoves investors to hang on tight

    TRY riding a mean-spirited horse which takes pride in throwing you off the saddle if you are not careful. That is how some traders have described trading in the Year of the Horse, which kicked off last week.

    The stock carnage started on Wall Street last Monday, which saw the Dow Jones Industrial Average plunge 326 points. It spread to Asia as one market after another plummeted in a knee-jerk fashion as they reopened for trading after the Chinese New Year festivities.

    But on Friday, US equities appeared to have regained their poise, with the Dow gaining 165 points despite a lacklustre job report which showed that only 113,000 jobs were created in the United States last month. This was significantly less than the 185,000 jobs anticipated.

    The wild swings in stock prices are symptomatic of a year that has been described by analysts as one that will be volatile for markets as they grapple with a host of issues.

    They include a possible slowdown in both the US and China, and the impact from a tightening of liquidity as the US central bank continues to taper on its massive bond purchases.

    The fund-flow data also offered little solace. Citigroup Investment Research's data showed that, last week, foreigners sold a net US$3.6 billion (S$4.6 billion) of funds investing in regional equities. Japan was worse hit, with a massive US$7 billion selloff by foreigners.

    As if the fund outflow was not enough of a headache for traders, there was the slew of proposals put forward by regulators on Friday to curb speculative trading and "strengthen the securities market" to mull over.

    In the pipeline is a move to replace the practice of giving an investor up to three days of credit for traders to settle outstanding stock purchases, with a requirement to get him to post a minimum 5 per cent collateral.

    For all intents and purposes, this means that an investor will have to keep some cash or stock with a brokerage in order to trade, unless he is prepared to rush down to the brokerage to put cash as collateral each time he makes a stock purchase.

    Other proposed safeguards include introducing a minimum mainboard trading price of, say, 10 cents to 20 cents - a significant measure, since stocks can be traded for as low as 0.1 cent now, and getting short-sellers to report their positions once they surpass certain thresholds.

    For market pundits, the immediate reaction is whether the proposals are already cast in stone in the regulators' minds, even though members of the public have until May 2 to offer their feedback on them.

    Mr Michael Dee, a former Morgan Stanley managing director, asked: "Is this a consultation, or are they just selling this plan to the public?"

    Remisiers are even more concerned, as their takings have been badly hit by recent sluggish market conditions, with the

    total value of stocks traded last month falling by 44 per cent to $22.5 billion, from $40.1 billion last year.

    "The concept is good, but it may cause trading liquidity to shrink further if the execution is poorly done," said one remisier.

    The biggest impact will, of course, be felt by the Singapore Exchange (SGX), whose share price may gyrate as traders contemplate the proposals.

    Some analysts are working out how SGX's profitability will be impacted by the move to cut its clearing fee by 20 per cent to 0.0325 per cent of the contract value, while removing the cap on fees for big trades, from May 2.

    All in, the proposals promise to be a game-changer. For traders, it is best to hang on tight as the Year of the Horse gallops ahead with momentous changes.