SINGAPORE (Oct 21): Three years ago this month, a handful of high-flying stocks lost more than $8 billion in market value within a matter of days. Six months later, in April 2014, the Commercial Affairs Department started what it has called its biggest securities fraud investigation, which has yet to be concluded. Since then, the Singapore Exchange has stepped up its market surveillance activities, and even hauled up one trading representative for “creating a false market” with his trading strategies.

Recently, SGX also launched what it calls the Members’ Surveillance Dashboard, which is a report customised for each member brokerage containing statistics and information on activities that could be related to market misconduct. The Dashboard, released quarterly, includes details of alerts triggered by SGX’s surveillance system. SGX says these “complement” its existing real-time market surveillance, and provides its members with information they may not have. However, each member receives only information related to its own activities. SGX has said the information will not be made available to the public.

Presumably, SGX is expecting brokerage firms to use the information to watch for signals of dodgy conduct in their dealing rooms, and take pre-emptive measures to prevent another confidence-sapping penny stock crash from happening. This is unlikely. Trading representatives and the brokerage firms that house them are primarily interested in making money for themselves, not preventing another penny stock crash. And, SGX is mistaken if it believes that banks and brokerage firms are not already aware of what goes on in their dealing rooms.

Indeed, just before Blumont Group, LionGold Corp and Asiasons Capital (now renamed Attilan Group) crashed to earth, some local brokers were imposing trading restrictions on the counters to insulate themselves from potential trouble. And, after the stocks collapsed, leaving a trail of broke and livid investors in their wake, some brokers proved themselves adept at going after the individuals they believed owed them money.

In November 2013, about a month after the penny stock crash, Interactive Brokers launched arbitration proceedings against eight of its customers to recover some $79 million owed. The online securities and commodities trading brokerage also applied for an injunction to freeze the assets of these eight parties, who traded through a non-registered financial adviser by the name of Algo Capital Group.

They included Neo Kim Hock, then chairman of Blumont; Quah Su-Ling, who was CEO of IPCO International; and Peter Chen, who is listed as the director of business and corporate development at LionGold.

In its court submissions, Interactive Brokers allege that these customers, through Algo Capital, had sought to manipulate the share prices of Blumont, Asiasons and LionGold. They did this between June 2012 and October 2013, through coordinating the buying and selling of large volumes of the shares.

Interactive Brokers said that, in the light of the Oct 4 crash and the subsequent investigations by regulators, it had determined that the eight parties “may have been involved in an intricate ‘pump and dump’ scheme”.

How did it know this? Interactive Brokers said “several patterns of trading” undertaken on its platform by Algo Capital did not appear to have provided any immediate economic benefit to the accounts. Instead, they may have given the appearance that shares in Blumont, Asiasons and LionGold were heavily traded, or may have stabilised or increased their share prices.

Interactive Brokers listed several examples of these “suspicious” trading patterns. For instance, on Aug 28, 2012, 1.35 million LionGold shares were sold by Peter Chen’s account. About three minutes later, 1.25 million shares were re-purchased at the same price, by the same account.

In another example, Algo Capital bought 983,000 Blumont shares on Sept 12, 2013, on behalf of Quah. Half an hour later, it began selling the shares at the same price, in the same account, at the rate of roughly 10,000 shares every minute.

The broker noted that on Sept 13, 2013, Algo Capital had traded about half of the total daily volume in Asiasons’ shares. Three days later, on Sept 16, trading by Algo Capital accounted for about 74% of the volume. In addition, Algo Capital had also asked the brokerage to review and loosen the margin requirements for trading in the three particular counters, which would maximise the amount of stock traded.

In its affidavit to support its injunction, Interactive Brokers also pointed out that the six people and two companies appear to be insiders or linked in other ways to Asiasons, Blumont and LionGold, and that “there was a maze of connections and overlapping ownership between the [three] companies”.

In short, Interactive Brokers was able to identify “suspicious” trading patterns on its platform when it had a reason to do so. And, although Interactive Brokers is not an SGX member firm, it seems logical that the local brokers would be able to similarly detect suspi cious activities on their online platforms and dealing rooms. And, if they are not already doing so, providing them with surveillance information about their activities is unlikely to change their behaviour.

SGX should instead make its market surveillance information available to the public. It would benefit investors greatly to know which stocks were exhibiting suspicious trading patterns and which brokers are involved. And, it is only when the public and the media begin asking questions that errant market participants are likely to reform themselves.

SGX already routinely issues queries to companies that have seen unusual movements in their share prices. Last year, it improved on its Trade With Caution alerts on stocks picked up by its surveillance systems for unusual trading activity. SGX says its market surveillance system typically generates more than 100 alerts a day; they are then reviewed by its team of surveillance analysts to filter out stock movements that are readily explained by publicly available information.

The first alerts were automated and issued in March 2014. Since then, SGX has been providing details after a review that could include interviews with brokers and other market participants, it says. For instance, in January this year, an alert about shares in Koyo International included information that, between Oct 26, 2015 and Jan 14, 2016, a small group of individuals was responsible for 60% of the trading volume, and that they largely bought and sold the shares among themselves.

More of such information would make the market a safer and more rewarding place for everyone, and perhaps stave off another embarrassing penny stock meltdown.

This story appears in Issue 751 of The Edge Singapore (week of Oct 24) which is available at newsstands now