Interesting Observations about “Short Attacks” In Singapore’s Stock Market

Commodities trader Noble Group Limited (SGX: N21) has been hogging the business news headlines lately because of its unfortunate status as the latest victim of a “short” attack” in Singapore’s stock market.

A “short attack,” as I’ve described in a previous article, is the act of funds or investment research outfits publicly announcing that a company’s shares are worth a lot less than its current market price due to issues such as fraud, poor management of the business, and/or a simple case of over-valuation.

Over the past three years, there’ve been a spate of Singapore-listed companies which have undergone short attacks. Here’s a recap of a few of those recent short-attacks that I’ve shared in other articles:

“In 2012, the research outfit Muddy Waters openly criticised commodities trader Olam International Ltd’s (SGX: O32) accounting and business model and stated that it held a short position in the company’s shares.

Then, in 2013, a research report released by Glaucus Research Group caused vegetable processor China Minzhong Food Corporation Limited’s (SGX: K2N) shares to plunge more than 50% in a single day. Glaucus claimed that China Minzhong had been engaged in fraud.

A year later in 2014, fruit and vegetables canner Sino Grandness Food Industry Group Ltd (SGX: T4B) was the target of an investing report which alleged that the company had vastly overstated its revenue and balance sheet figures.”

I’m not here to debate whether it’s right or wrong for those short-sellers to have done what they did. Instead, I’m here to discuss interesting observations about these short-attacks.

Of the three companies mentioned above – Olam, China Minzhong, and Sino Grandness – Sino Grandness is the only one that’s still trading at a price significantly lower than where it was before the short attack happened.

For me, there’re two main reasons for the price-recovery phenomenon (besides the obvious one where the short-sellers may have gotten things wrong).

Reason 1

There are more restrictions for shorting in Singapore’s market than it is to go long.

As an example, here’s what Chew Sutat, an Executive Vice President at stock exchange operator Singapore Exchange (SGX), wrote in a November 2014 letter published in the Straits Times:

“A long-investor can buy shares without paying the full amount for up to three days after the purchase, but a short-seller must cover his position during the day or borrow shares.

While there is no reporting requirement for long trades apart from trades in excess of 5 per cent, or by shareholders holding 5 per cent or more of the company, brokers are required to flag all short trades with daily results published on the SGX’s website.

Going forward, the Monetary Authority of Singapore will implement aggregate short position reporting, which would require investors to report short positions that exceed the lower of 0.05 per cent, or $1 million of shares.”

So just to reiterate, there’re more hurdles to clear in Singapore when it comes to short-selling as opposed to going long (the act of buying shares for capital gains and dividends).

Reason 2

Another more subtle reason is the relative ease with which companies listed in Singapore can ask for trading halts. A comparison of SGX’s trading rules with that of the New York Stock Exchange (NYSE) would be illustrative.

According to Chapter 13 of SGX’s listing rules (emphasis mine):

“(1) The Exchange may at any time grant a trading halt to enable the issuer to disclose material information or suspend trading of the listed securities of an issuer at the request of the issuer. The Exchange is not required to act on the request.
(2) The trading halt cannot exceed 3 market days or such short extension as the Exchange agrees.
(3) A trading halt may be changed to a suspension by the Exchange at any time.

Meanwhile, the NYSE’s general rules for a trading halt are stated as follows (emphasis mine):

“Securities exchanges, such as the New York Stock Exchange (NYSE) as well as the Nasdaq Stock Market, have the authority to halt and delay trading in a security. A trading halt—which typically lasts less than an hour but can be longer—is called during the trading day to allow a company to announce important news or where there is a significant order imbalance between buyers and sellers in a security.”

Thus, we can see that trading is generally halted for around an hour or in the NYSE whereas SGX allows halts of up to three market days.

In the event of a Singapore listed-company being hammered by a short-attack, a three-day halt can give the firm time to prepare a good response to short-sellers, if needed. In addition, the initial shock from any negative reports can also possibly be dampened and a Singapore-listed company can ensure that the market has calmed down before restarting trading of its shares.

Foolish Summary

Given what I’ve seen, my main takeaway is that shorting a company here seems to require more effort on the part of investors; consequently, it might be better to just focus our attention on finding great companies to invest alongside with for the long-term instead.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore writer Stanley Lim doesn’t own shares in any companies mentioned.