SGX - There is no elephant in the room

Since the announcement of the consultation paper and some proposals by MAS and SGX, there were a few familiar quips by the stakeholders. We do not want the SGX to be turned into a casino. Now who is talking? Is there an elephant in the classroom? They could not see it, didn’t recognise that the big mass is an elephant and pretending that not to see the elephant?

How fake or how stupid can things be when no one seems to notice the elephant in the classroom? And an article in the ST on Saturday had this title, ‘Few quibbles over collateral proposal for contra trades’. The introduction of collateral for contra trades is perhaps the biggest thing in the consultation paper and is going to be done for the purpose of reducing exposure and risks of broking houses and remisiers and to strengthen the trading system.

One thing for sure is to hasten the demise of a dying stock market when this measure is implemented. The 5% collateral for all outstanding positions would be a callous sledgehammer smashing down on any tiny nail heads protruding. There would be many procedural problems that would make this recommendation impractical. But top most is that it is not dealing with the real problem but creating new problems. Some refinement is needed and remisier Alvin Yong came up with a logical and practical proposal, to apply the collateral only to trades above the value of $50k. It is the big contra positions that would hurt the remisiers and the brokerages, not the small positions of the small traders. And given the limited size of active traders, such an across the board ruling will simply keep the small traders from trading when their participation is badly needed in a stockmarket with no players except computers.

If MAS and SGX want to bring the stock market to a pre mature and early demise, this is the way to go. Impose the collateral indiscriminately and the last few remaining small traders will say goodbye to punting in the market. Yes they are gambling, but in a small way and with manageable and tolerable risk. It is the big churnings of computer tradings and big time speculators that are raising the risk level in the industry. They should be the targeted group for this 5% collateral. They pose huge credit risk, not the small investors and punters. They are the really gamblers, with the help of a system that is designed for them to gamble.

Is there an elephant in the room? Anyone wants to look at the elephant or choosing to look the other way and spray their little water pistols wildly at shadows? It does not need much intelligence to notice the elephant in the room.

PS. Goh Eng Yeow also wrote a piece in today’s ST explaining why forcing small traders to put up collaterals is skirting the real problem caused by big positions. Come on, who are MAS and SGX kidding, to want small traders to put up collaterals even for trades of $1000 or $10,000 exposure? Would it solve the gigantic loss problem or would it kill the market when small retail traders just stay away, like the removal of teletext on TV?