Singapore Exchange Ltd. (SGX), Southeast Asia’s biggest bourse, faces calls from investors to add circuit breakers after a plunge in shares of three commodity companies erased $6.9 billion in value over three days.
The bourse operator imposed unprecedented trading restrictions on Blumont Group Ltd. (BLUM), Asiasons (ACAP) Capital Ltd. and LionGold (LIGO) Corp. after their stock prices plunged. Trading caps to prevent sharp gains or losses will give investors time to assess their holdings, according to Liquidnet Holdings Inc. and the Securities Investors Association of Singapore.
Regulators worldwide have evaluated safeguards since the May 2010 plunge known as the flash crash briefly erased about $862 billion from the value of U.S. equities. American exchanges have implemented a limit-up/limit-down initiative that prevents market makers from quoting shares at prices deemed too far above or below current levels.
“It’s more important now because today there’s so much electronic trading,” Seth Merrin, founder and chief executive officer of New York-based Liquidnet, operator of trading platforms for mutual funds and asset managers, said in an Oct. 7 interview in Singapore. “That’s how a stock can go down from $40 to a penny. I’m 100 percent in favor of circuit breakers.”
Regulators around the world have stepped up oversight of capital markets after the global financial crisis in 2008. The Monetary Authority of Singapore established a 13-member council in 2010 with the goal of boosting corporate governance standards and investor confidence.
While existing rules in Singapore are sufficient for company disclosures, regulators may need to introduce an “early warning” system for investors, said David Gerald, president of Securities Investors Association or SIAS, the largest organized investor lobby group in Asia.
“SIAS calls on SGX to implement the circuit-breaker mechanism immediately to help prevent wild fluctuations of stock prices to enable investors to digest the information available in the marketplace during the break and make informed decisions,” he said in a statement yesterday.
The exchange said Oct. 6 that shares of the three companies have been declared designated securities, prohibiting investors from selling them unless they hold the same quantity of stock. Buyers must make cash payments for the transactions, it added. Carolyn Lim, a spokeswoman for the bourse, didn’t immediately comment on the call for circuit breakers yesterday and couldn’t be reached in her office today.
Blumont, which invests in minerals and energy, slumped 94 percent over two trading days on Oct. 4 and Oct. 7, before closing unchanged yesterday. That shaved S$4.9 billion ($3.9 billion) off its market value, prompting the company to scrap a proposed S$146 million acquisition of Australia’s Cokal Ltd.
The stock rebounded earlier yesterday, more than doubling after Alexander Molyneux, former CEO of SouthGobi Resources Ltd., invested in the company. He will buy 135 million Blumont shares and become chairman after the purchase is completed, the company said. Molyneux, who was ousted as CEO of SouthGobi in September 2012, is a director of Ivanhoe Energy Inc. Blumont climbed 46 percent at the close in Singapore, the biggest gain in more than four years.
“It’s not for us to comment on the restrictions,” Molyneux said at a press conference in Singapore yesterday. “The exchange does their job, they have their rules, and we do our job. Whether or not any regulatory issues caused the share-price slide, I believe it created a unique value opportunity and that’s why I bought the stock.”
Kelly Teoh, a strategist at IG Markets in Singapore, said last week that short sellers are taking advantage of the “weak market sentiment.” She said yesterday Molyneux’s investment in Blumont should stem further selling in the stock.
Before the selloff, Blumont was the best performer on Singapore’s broader FTSE ST All-Share Index (FSTAS) after a more than 12-fold increase in the first nine months of the year.
Asiasons, which last month bought a stake in U.S. oil and gas producer Black Elk Energy Offshore Operations LLC, tumbled 96 percent over three trading days through yesterday, shaving S$2.5 billion in market value.
The stock, which was the second-best performer on the FTSE ST All-Share Index, more than tripled in the nine months through September. The company said Oct. 4 rumors that it’s being investigated by regulators are false. The shares climbed 38 percent today.
LionGold, which said this week it’s in advanced negotiations for a possible acquisition of Minera IRL Ltd., a gold explorer in Peru, Argentina and Chile, plunged 87 percent over the three-day period, wiping off S$1.2 billion in market value. The shares climbed 42 percent in the first nine months of the year. They fell 0.5 percent today.
The swings in the prices of these companies are “worrisome signs” that should be investigated, said Jim Rogers, chairman of Singapore-based Rogers Holdings. Still, he’s against the introduction of circuit breakers.
“They should let the market take care of itself,” he said in a phone interview on Oct. 7. “Circuit breakers are absurd. It’s just another interference for the market.”
Circuit breakers could also affect investor perception, said Andy Maynard, global head of trading and execution at CLSA Ltd. in Hong Kong, adding that Singapore should keep its market open and free.
Trading limits are “just part and parcel of doing business in those markets where there isn’t a concept of a free market in the first place,” he said in an e-mailed response yesterday. “As long as participants are able to settle and deliver stock, then stocks should rise and fall on their own attributions.”
Still, the call for circuit breakers comes one month after Everbright Securities Co. (601788) announced a 523 million yuan ($85 million) loss after $3.8 billion in erroneous trading orders that roiled China’s equity market and drew a record regulatory penalty that banned four of its executives from the market for life.
Trading in the National Stock Exchange of India’s Nifty (NIFTY) index and some individual companies stopped for 15 minutes in Mumbai a year ago after the 50-stock gauge tumbled as much as 16 percent. A brokerage that mishandled trades for an institutional client was to blame, the exchange said then.
Singapore’s Straits Times Index has slipped 0.7 percent this year, the only decline among the world’s developed markets.
“A lot of this stuff is emotional and just feeds on itself,” Liquidnet’s Merrin said. “If investors take a step back, maybe they’ll realize that it’s not as bad as you thought it was. There’s no reason not to have circuit breakers.”
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