Saturday, May 26, 2012

Featured Article: The Said Error Trade On KL Kepong

On Star Biz: More than an error?

  • Saturday May 26, 2012
    More than an error? Optimistically Cautious

    After two weeks, Bursa Malaysia has yet to give an update on trade cancellation request.

    IT has been two weeks since Bursa Malaysia made a special announcement about a trade cancellation request. It's definitely special in the sense that such requests come along maybe only once or twice a year, if at all. What makes it stand out even more is that the stock exchange has not said much else about the latest incident.

    On May 11, Bursa Malaysia informed that it had received a request to cancel trade (or trades) arising from a “participant's error” for Kuala Lumpur Kepong Bhd (KLK) shares done at RM17. On that day, other transactions in the stock was for more than RM23.

    “The exchange will make a decision of the request and will communicate the decision to cancel the trade or otherwise to all in due course,” added Bursa Malaysia, which neither named the market participant nor disclosed the nature of the error.

    The non-disclosure of those details is consistent with the practice in similar cases in the past, but what's unusual this time is that the exchange has yet to go public with its decision on the request, or indeed, with whether the matter has been decided.

    It has since come out that the participant in question is Kenanga Investment Bank (Kenanga IB), through whom a sell order was issued for 500,000 KLK shares at a significant discount to the market price. It was an irresistible “bargain”, and the shares quickly found buyers.

    Kenanga IB says it was notified verbally on the same day that there will be no cancellation, and has acted accordingly. The next trading day, it bought KLK shares to settle the error trade. Apparently, the investment bank considers the case closed and has moved on.

    But if everything has been neatly resolved, what's keeping Bursa Malaysia from giving an update? What's different with this episode?
    A search of the stock exchange's website shows that there have been at least three other trade cancellation requests in recent years.

    In June last year, there was a request to cancel a trade in Parkson Holdings Bhd shares done at RM7.73, also “arising from a participant's error”.

    In December 2009, Bursa Malaysia was called upon to decide whether to cancel a transaction in which 200,000 shares of Ge-Shen Corp Bhd changed hands at 4 sen.

    Another case in October 2009 forms an uncanny symmetry with the latest trade cancellation request. The stock is KLK and the reason given is a participant's error. The special announcement did not state the price, but it was reported that the transaction was done at RM17! In this instance, it was above the then market price of over RM13.

    The stock exchange rejected all three requests and each of those decisions was announced on the same day the respective request was made. Does this mean the current KLK error trade is a more complicated affair? If so, is this something that the investing public and the stockbroking industry ought to know about?
    It doesn't help that there has been talk that the trade cancellation request could have been due to an unauthorised use of a dealer's account to put through the sell order for the KLK shares. Kenanga IB does not deny or confirm this, and refuses to divulge details of what it calls an “internal matter”.

    When the media had sought comments on the cancellation request and the circumstances behind it, the stock exchange twice gave this answer: “Aside from information publicly available, as a matter of policy, Bursa Malaysia does not disclose details of any market transactions.”

    Speaking of policy, Bursa Malaysia's trading manual for participating organisations explains the exchange's policy on trade cancellation arising from participants' error.

    The manual doesn't define participant error, but it does specify that this policy covers “price errors due to keying-in by participants which causes a trade to be executed at erroneous price substantially inconsistent with the prevailing market price”.

    The manual next sets out the price ranges in which an erroneous trade can or cannot be cancelled.

    It adds: “The benefit of establishing and identifying such ranges in advance will provide market participants with certainty as to the price traded and provide consistency of treatment by the exchange in handling erroneous trades.”

    Presumably, this is why the previous three cases of trade cancellation requests could be decided within hours; it was a matter of determining which price range applied to each erroneous trade.

    Given that Bursa Malaysia has had no updates on the current KLK case after two weeks, it doesn't seem that the trade cancellation request stemmed from a price error caused by somebody slipping up at the computer keyboard. This only strengthens the belief that Kenanga IB has claimed that its dealer's account had been hijacked.

    If true, when is a good time for Bursa Malaysia to reveal that this is not merely a participant's error? We can appreciate that the regulators are often unable to furnish particulars of an ongoing probe and that may well be the case here but why not be forthcoming at least about the longer-than-usual time needed to evaluate the request?
    People are prone to fearing the worst when they're starved of information. That's when it is hard to maintain a fair and orderly market.
    > Executive editor Errol Oh would love to have a chat with anybody who bought KLK shares on May 11 at RM17 each.
Exactly. The silence is truly deafening!

Other articles on this error:
  • Error trade may have cost Kenanga RM1.7m Written by Ben Shane Lim
    Thursday, 17 May 2012 14:42

    KUALA LUMPUR: Kenanga Investment Bank Bhd may have lost around RM1.7 million in last Friday’s alleged error trade involving Kuala Lumpur Kepong Bhd (KLK) shares.

    According to sources, a “dormant direct market access (DMA) account” belonging to Kenanga was responsible for the sale of 447,400 KLK shares at RM17 per share at around 3pm last Friday.

    The selling price was a 27.6% discount to KLK’s closing price of RM23.50 per share on May 10 and works out to some RM2.9 million in potential losses.

    According to sources, Kenanga managed to minimise its losses to RM1.7 million by quickly buying back some of the shares.

    The trade was below the threshold of the static limit imposed by Bursa Malaysia, which will freeze trading on the stock for a short period if a stock trades 30% above or below its opening price.

    But a yet-to-be implemented feature known as dynamic limits could have prevented the allegedly erroneous trade, said a market observer. He said dynamic limits allow for multiple trigger limits which can be set with narrower price bands than the static limit. When a particular stock hits the trigger limit, matching on the stock will be paused for 30 to 60 seconds, enough time for the dealer to withdraw the order if it had been erroneously entered.

    Kenanga officials would not confirm or deny the trade. In an email response, the company said: “Kenanga doesn’t have any comments on this matter.”

    In an announcement last Friday, Bursa acknowledged there was a request to cancel the alleged error trade on KLK shares but did not name the party making the request. “The exchange will make a decision on the request and will communicate the decision to cancel the trade or otherwise to all in due course,” it said. The market regulator is still investigating the matter, said industry observers.

    Bursa declined to answer any questions from The Edge Financial Daily and wrote: “Aside from information publicly available, as a matter of policy, Bursa Malaysia does not disclose details of any market transactions.”
    While the regulator has the authority to cancel the trade, market observers argue that in practice it is typically not possible to cancel or unwind a trade, even if the trade can be proven to be a genuine error.

    “Once such an incident has happened, not much can be done. Reversing a trade raises a lot of ethical issues. There should be better measures in place to prevent such trades as it will have an immediate impact on the market,” said one market observer.

    KLK’s share price rebounded minutes after the incident but its sudden fall knocked 14.17 points off the FBM KLCI.

    This article appeared in The Edge Financial Daily, May 17, 2012.
Last Staurday:
  • Saturday May 19, 2012
    MB: Kenanga IB took swift action By ERROL OH

    PETALING JAYA: Kenanga Investment Bank Bhd (Kenanga IB) says it has acted swiftly and appropriately to address an error that had prompted it to ask for a trade cancellation last week. However, the investment bank declined to explain how it ended up the intermediary for the sale of 500,000 Kuala Lumpur Kepong Bhd (KLK) shares at a low price, insisting that this was an internal matter.

    Chay Wai Leong, group managing director of K&N Kenanga Holdings Bhd, the parent of the investment bank, said Kenanga IB bought KLK shares to settle the so-called error trade even before the market opened on the next trading day.

    We responded very quickly with the buy-in. The management dealt with it properly and neatly. As soon as possible, we were out of it, he told StarBizWeek.

    On a news report that the investment bank might have lost RM1.7mil due to the error trade, Chay said the reported figure was incorrect and that the actual amount was not big. He however refused to be specific.

    We have reviewed all our internal processes and we have put in further safeguards to minimise the possibility of a recurrence, he added.

    On May 11, Bursa Malaysia announced that it had received a request to cancel trade(s) arising from a participants error for KLK shares done at RM17. At the time, the stock was being bought and sold for more than RM23.

    The exchange said it would communicate in due course the decision whether to allow a cancellation. At press time, there has been no update on this. However, Chay said Kenanga IB was verbally notified on the same day it made the request that there would be no cancellation.

    There has been talk within the industry that the trade cancellation request might not have been due to a human error or a technical glitch as is usually the case. Instead, this could have been caused by an unauthorised use of a dealers account to put through a sell order for the KLK shares.

    Chay did not deny or confirm this, but said: Its just an internal matter. Its an error trade. As has been done with most error trades, we have done the necessary rectifications, such as the buying in, which we did on Monday (May 14). As far as were concerned, the incident is over.

    Its part and parcel of the business. There are hundreds of thousands of trades a year. One or two may slip up. The industry has a mechanism for this, and already has safeguards that protect all the brokers.

    Earlier this week, the Kenanga IB remisiers handed a letter to the management to express their concerns over the episode and to urge that preventive measures be taken. Chay said the matters raised had been addressed.

    On how Kenanga IB justified labelling the KLK trade as an error, he said: Nobody would sell shares at RM17 when they are (trading at) RM23-something. Thats an error.

    He pointed out that the fact that there were only one or two trade errors occurring every year gave the comfort that these were not prevalent. Generally, the market is fair and orderly. I believe this (the KLK error trade) was an abnormal event, he added.

    When asked about the possibility of a dealers account being hijacked, a Bursa Malaysia official said: Aside from information publicly available, as a matter of policy, Bursa Malaysia does not disclose details of any market transactions


    Moolah said...

    Posted at Satr Biz...


    Tuesday May 29, 2012
    Bursa: Request to cancel KLK trade was denied

    We refer to the commentary entitled “More than an error?” published in StarBizWeek’s Optimistically Cautious column on May 26.

    Bursa Malaysia wishes to clarify that the request to cancel the trade for the Kuala Lumpur Kepong Bhd (KLK) shares in question on May 11 came from a participating organisation (PO). We notified the PO on the same day that the request to cancel the trade could not be considered. The PO was advised to take the necessary steps to settle the error trade. Apart from information publicly available, details of our market operations are confidential. However, the parties involved in the trade were informed of the steps taken.

    We wish to clarify that the error arose as a result of an internal matter at the PO. The exchange has required the PO to take steps to prevent a recurrence of such incidents.

    As a stock exchange operator, Bursa Malaysia places significant emphasis in ensuring access as well as the safety and security of trading that takes place in the market. We would like to assure the investing public that the exchange takes a comprehensive approach in the operation of an enduring marketplace that promotes high standards of integrity and confidence.

    Elain Mariman

    Acting head, strategic communications

    Bursa Malaysia