By Lawrence Yong
Eight small-cap stocks that went on a roller coaster experience and were jerked up or down by about 30% on Friday have reverted back to their pre-trading-frenzy prices on Monday, with Bursa Malaysia officials labelling over RM40 million worth of unusual trade as “valid and genuine.”
On Friday, about 15 minutes before market’s closing, the shares of Hap Seng Plantations, Batu Kawan, TDM, CB Industrial Product, Coastal Contracts and Berjaya Sports Toto hit limit down or a 30% plunge, while The Star Publications and JCY International gained 36% and 29% respectively.
“With regards to the eight stocks which hit its limits up (two) and down (six), Bursa Malaysia has investigated the matter and has confirmed with the broker that the basket order, which was from their institutional client, was valid and genuine,” a Bursa Malaysia representative wrote in reply to KiniBiz queries.
This is not considered ‘unusual market activity,’ the official said. A Securities Commission (SC) official also referred questions back to Bursa Malaysia, which is in charge of regulating trade on Malaysia’s stock market, estimated to be worth some RM1.6 trillion in market cap.
Industry sources said the unusual trading frenzy on Friday saw some RM40 million worth of shares change hands. While it could not be confirmed, one source said that at least three brokers- – local-broker Kenanga, Hong Kong-based CLSA, and Zurich-based Credit Suisse may have executed the trades for undisclosed clients.
One source said that market rumour named Bank of New York Mellon and mutual funds manager Vanguard, simply because they may be huge enough and specialised enough for such programmed trades.
But without a firmer explanation from Bursa Malaysia, it was all pure speculation.
Local equity research analysts meanwhile said that it could either be a programmed trading error or a trader unwinding a big position in a hurry, all of which could help negate taking a loss on the questionable stocks trade.
One frequently watched blogger — malaysiafinance.blogspot.com — speculated that it may be an institutional investor using a “carry trade” strategy. According to investment website Investopedia, this means that an investor sells a certain currency with a relatively low interest rate and uses the funds to purchase a different currency yielding a higher interest rate. The carry trade may have also had another leg, locking in good dividend yield spreads between borrowing cost for example.
“Carry trades have been rampant over the past couple of years as big hedge funds could realistically borrow large sums at near 0%, provided it is in yen or USD,” the blogger, who identifies himself as ‘Salvador Dali’ noted.
“When you are borrowing near zero, you want that 3%-5% dividend yield and lock in that spread. The bumper will be the capital appreciation, but usually they will also hedge the share price going in and out.”
Analysts said that since Bursa Malaysia has not suspended the stocks on Monday or declared it as an error trade, the buyers or sellers who have been queuing up on the other side of the trade on Friday would have benefited.
“It’s like durian runtuh (windfall bonanza),” one local equity analyst said.
Most do not expect the beserk incident to be repeated. The same eight stocks were again seen to have hit trading limits on their way up or down on Monday, in reversal of Friday’s trade.
There were also some who speculated that funds may have tried to dress up their portfolio but this may be unlikely, analysts said.
“It is not likely to be an indexed fund unwinding as none of them really matched the real index in any way,” blogger Salvador Dali noted. “Judging from the selling, it looks like a programme trade and not done manually.”
Others said that the original traders could have gotten better prices if trades were done more discreetly but this may have required a lot of executors and time and effort to monitor many markets. Therefore, it must have been done by a programme that factored in the loss-making trades and still came up profitable elsewhere.
Either that, or the computer programme went haywire.
Malaysia is not the only market to have experienced such a blip. One analyst said that the such programmed trades dubbed “algorithm trading” have hit Singapore, Hong Kong and even the London and US markets recently. A special class of algorithmic trading is “high-frequency trading” (HFT).
According to Wikipedia, HFT strategies utilise computers that make elaborate decisions to initiate orders based on information that is received electronically, before human traders are capable of processing the information they observe.
Wikipedia said HFT probably caused the 2010 “Flash Crash.” On May 6, 2010 Flash Crash, also known as The Crash of 2:45, was a United States stock market crash in which the Dow Jones Industrial Average plunged about 1000 points (about 9%) only to recover those losses within minutes. It was the second largest point swing, 1,010.14 points, and the biggest one-day point decline, 998.5 points, on an intraday basis in Dow Jones Industrial Average history.
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