SOME investors rushing back into the red-hot market have been caught out by new rules on short-selling and heavily fined for selling shares that they did not actually own.
They have been told by the Singapore Exchange (SGX) to pay fines of $1,000 or more within five days of failing to settle their trades.
The penalties were introduced last September to deter 'naked' short-selling during a period of near panic on global bourses.
Such short-selling occurs when a trader sells a stock he does not own or has not borrowed in the hope that the price will fall. This would allow him to pocket the difference.
But the SGX appears to be catching an increasing number of 'innocent' investors who fail to deliver small quantities of shares when a trade is due to be settled three days after it is transacted. The trades are usually 1,000 or 2,000 shares of a blue chip like DBS Bank or SingTel.
When investors fail to come up with the shares at settlement, the SGX has to buy the stock on a specially established buying-in market. It then delivers the shares to the buyer on the seller's behalf - as well as levies a hefty fine.
The number of failed trades has risen sharply in line with the rise in daily market volumes. They have more than doubled in the past month, from 1.4 billion shares to 3.7 billion.
Two weeks ago, the SGX buying-in market attracted trading in about 10 to 15 counters a day. By yesterday, the list of counters traded had grown to 50.
Many of these failed trades have apparently been made by retail investors returning to the market after a long absence. They are selling online shares held in Central Provident Fund (CPF) accounts without specifying that they are CPF trades, or their accounts were not properly linked up to the SGX.
One remisier gave the example of a client fined $1,000 after selling 1,000 OCBC shares online.
'He had correctly keyed in his order as a CPF trade. But his online account was not linked to his CPF account and it became a failed trade,' he said.
The fine was revoked after the client appealed.
Many recent investors are infrequent traders and likely unaware of the SGX's move last September to impose a penalty of 5 per cent of the value of such failed trades, with a minimum penalty of $1,000. This is on top of a $30 processing fee it levies for each contract on the buying-in market.
In imposing the fine, the SGX had said it wanted to deter 'undesirable market conduct' after widespread alarm at the rampant short-selling that threatened to bring financial giants in the United States and Britain to their knees.
An SGX spokesman told The Straits Times that traders can appeal: 'We have received a significant number of appeals. There have also been a number of successful cases with granted waivers.'
But Mr Albert Fong, president of the Society of Remisiers, described the appeal process as 'very demoralising'.
He said: 'I have a remisier friend who oversold 10,000 CapitaLand shares because of a keying-in error. The next day, he covered back his position but his appeal to SGX was rejected and he had to pay a fine of $1,290.'
All his friend received was a standard reply from the SGX 'regretting that it is unable to accede to his request for a waiver of the fine'. The letter did not spell out the grounds for rejecting the appeal.
Buying-in lists released daily by the SGX in recent days also show that the penalty amounts could be bigger than the value of the shares involved.
Yesterday's list, for example, threw up short-sales of 1,000 Genting International shares costing $735, 150 SingTel shares costing $417, and 1,000 Lee Metal shares worth $155. Each trade could attract a fine of $1,000.
It has re-ignited a debate as to whether the SGX has used a sledgehammer to tackle what seems to be a minor problem.
Mr Fong is hopeful that the issues raised by failed trades will be resolved if the SGX pushes through with its proposal to allow short-sellers to buy shares on the day before they are supposed to deliver them for settlement.
But as the consultation paper was put up only in March, it may take some time before the proposal is implemented.
