Thursday 28 Mar 2024
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This article first appeared in The Edge Malaysia Weekly on February 8, 2021 - February 14, 2021

Maintaining a fair and orderly yet vibrant market

 

DATUK Muhamad Umar Swift is on the brink of completing his first two years as the CEO of Bursa Malaysia Bhd.

Two years ago when he took over the reins from Datuk Seri Tajuddin Atan, there was little interest among the general public to trade and invest because Malaysian equities were neither cheap enough to buy nor high enough to sell. In fact, since the onset of the 1997/98 Asian financial crisis, retail investors who used to be active mainly shied away from equities.

Umar, who was previously the managing director and CEO of MAA Group Bhd, was tasked to make Malaysian equities more attractive and the local bourse vibrant again by building stronger bridges for all market participants and stakeholders. Back then, little did he — or anyone, for that matter — know the local bourse would later become an unexpected, indirect beneficiary of the Covid-19 pandemic.

Bursa rode a wave of retail participation and market vibrancy that translated to a record net profit of RM377.74 million in the financial year ended Dec 31, 2020 (FY2020).

As it turned out, the measures to curb the pandemic were a major boost for the stock exchange, which saw its average daily trading value more than double year on year (y-o-y) to RM4.2 billion. Various accompanying factors such as the Movement Control Order (MCO), loan moratoriums, interest rate cuts, as well as rubber glove mania, stimulated the retail investor boom — something not seen in decades.

During the mid-year stock market rally last year, Bursa’s trading value surged to a record high of RM10.447 billion on Aug 4. A week later, on Aug 11, its trading volume reached an all-time high of 27.796 billion shares.

At the end of last year, retailers were net buyers at RM14.2 billion. The number of Central Depository System (CDS) accounts opened increased by 132% y-o-y. Notably, about 65% of the CDS accounts opened were by millennials between the ages of 25 and 40.

While a more vibrant market means a bigger number of market participants, it also comes with challenges for Bursa as a frontline regulator. From the mushrooming of unlicensed self-proclaimed investment gurus (see sidebar: Bursa’s take on promotion of stocks on social media) and the democratisation of investing through social media to the penny stock craze and possible misconduct by market participants, the regulators certainly appear to have their hands full ensuring a fair and orderly market.

Behind the market interest, however, are retail investors getting carried away, as seen from the emergence late last month of the Reddit Bursabets group. How can listed companies and participating organisations improve on corporate governance to ensure that the interests of shareholders and investors are well-protected?

All in all, have these developments made Umar’s job easier or more difficult? Is the return of retail investors — now the new force in the market — a happy problem for him?

“There are always different challenges. Today, it is a vibrant market, and we like it. When the market has vibrancy, it has to be managed constructively. It is a challenge for our market surveillance department. But overall, I am not complaining. We take nothing for granted, and our team works very hard,” he tells The Edge in a virtual interview.

“You can have a fair and orderly market as much as you want, but you may not have the market vibrancy. From the stock exchange’s perspective, we want to maintain a fair and orderly market that is vibrant, where all investors, be they short, mid, long term, are being represented,” the 56-year-old stresses.

Umar was officially appointed CEO and executive director of Bursa on Feb 11, 2019. The Australian national, who is also a permanent resident of Malaysia, was given a two-year contract with the stock exchange.

When asked about his current contract status, Umar merely replied, “Business as usual. No change in management.”

While he declines to divulge much about the details of his contract extension, it is safe to assume that he will be staying at the helm for the next couple of years, as Bursa has initiated a three-year strategic roadmap that aims to provide more convenience, open new channels of access and offer compelling products to sustain the interest of investors (see sidebar).

“Diversity of product and service offerings is a strong magnet to draw in investors. Any exchange cannot survive on trading revenue from conventional assets alone. We will be expanding into offering other asset classes, helping capitalise new, emerging areas of the economy, and we will provide access to advanced data-driven services,” Umar highlights.

“Retail investors, as well as institutional investors, are very close to my heart. We are really looking forward to how we can delight them further,” he adds.

Nevertheless, he has a more immediate problem to deal with.

The recent short squeeze rally that pushed up shares in New York-listed video game company GameStop Corp was mainly fuelled by social media chat rooms against short-sellers. Their discussions about stocks in the “wallstreetbets” forum on social news aggregator site Reddit inspired some Malaysian retail investors to create a new subreddit group called “bursabets”.

Similarly, they attempted to drive up the share prices of rubber glove makers and counter the short-sellers who tend to drive prices down.

Commenting on the GameStop phenomenon and the role social media plays in the democratisation of investing, Umar says that while he likes to see robust discussions among retail investors, he is also concerned that some of them may be misguided by stock market operators or maybe even individuals who try to manipulate stock prices for personal gain.

“Two years ago, I was talking about democratising investing, but it was more from a product perspective. But today, the democratisation of investing is largely through new technology, as what we have seen lately, in the chat rooms of social media. I like robust discussions. I want people to think about how the FBM KLCI might be heading. I want them to be talking about stocks and I want them to have opinions on listed companies, because when they do, they invest and they trade,” he says.

“Now, if you look at the correlation between rubber gloves and vaccines, every time when there is a positive development on vaccines, the glove stocks will take a hit. That’s natural. But I am very concerned that the animal spirit of some investors might be misguided by those who take advantage of chat rooms to promote for their own interest, so that they could pump and dump. I want people to be mindful,” Umar alerts.

Understand the risks

While GameStop’s short squeeze scenario is not likely to happen in Malaysia, given that the market here is very structured and regulated, Umar reminds retail investors to remain careful and exercise caution when participating in social media chat rooms promoting specific stock trading.

“We have seen the whole run-up of GameStop before it fell dramatically. Just imagine if you had bought GameStop shares at the wrong time; you could be left high and dry. Now, if you are fully aware of what you are doing and you understand the risk, there is no issue with that. It is your own decision. I don’t question them,” he says.

“However, if you (blindly) follow the people in the chat room and they told you to go all the way, despite the fact that it is clearly trading above fundamentals, this is something that concerns us, because we want you to make an informed decision. What we saw in the chat room of rubber glove stocks is that when the share prices are down, certain people are hoping [for] others to indemnify them.”

That being said, he opines that the BursaBets trend is not unhealthy as long as investors use it the right way.

“We have talked about how and why more people are getting more interested in the stock market. But the key thing is to make sure that they could make informed decisions. Again, I like robust discussions. It is not okay to provide investment advice, but it is okay to provide a view. More importantly, people need to ask the right questions,” Umar explains.

Addressing market misconduct

Since the outbreak of the pandemic, the market environment and demand for healthcare products have seen many companies venture into glove manufacturing, vaccine distribution, as well as other healthcare-related businesses. Oftentimes, these companies have little to no experience or track record in the industry. But such news usually propels their share prices to lofty levels on the basis of just memorandums of understanding (MoUs) signed, and when they are called off, share prices crash, leading to allegations of manipulation.

So, how will Bursa’s regulatory arm be looking into the questionable deals announced by these companies? How independent is it from the exchange’s profit-driven goals, and will it have teeth to do its work?

Umar says Bursa and the Securities Commission Malaysia (SC) are waiting to roll out a long-awaited regulatory subsidiary — Bursa RegSub — to further enhance the governance structure of the exchange by segregating its regulatory functions from its commercial objectives to address the perception of potential conflicts of interest between the two roles.

“The regulatory environment structure has been referred to the AG (Attorney General). Once he approves it, then we will roll out the RegSub. We have a board. The board members have been approved. The entity has been created and capitalised,” Umar says.

“When the regulation is approved, we will make public disclosure. I am hoping to get this done by the first quarter of this year, if not sooner. The key thing here is that the RegSub is similar to that of Singapore, the structure is quite in line, it is independent, it is there to address the conflict of interest and all that. It is adequately capitalised and resourced.”

On the surge in company announcements of new investments or business collaborations — by way of MoU, letter of intent or distributorship agreements — Umar says Bursa will always try to engage with the companies constructively.

“If it is a general statement, we will query that. ‘Do you have the capacity and ability? Who is your counterparty?’ Again, we want a fair and orderly market. When we see trends that are unhealthy, such as someone stacking up orders, we will be making some phone calls to the participating organisations that are involved,” he warns.

UMA is necessary

But with the stock trading continuing to be active, will we see more unusual market activity (UMA) queries? Has Bursa strengthened its monitoring system to crack down on speculative trading?

Umar says UMA is necessary to provide clarifications, but he acknowledges that “at the end of the day, we could only take what they tell us”.

“We are looking at the announcements and the trading behaviours. We are making sense of what is happening from the trades. Investors have to be mindful,” he cautions.

Umar goes on to say that every company is entitled to make announcements.

“We can’t stop them from doing that. In fact, there are obligations from directors to make certain necessary announcements. What we don’t want to see is that all these self-serving announcements are being circulated in the chat rooms,” he explains.

When pressed about issues such as market abuse, market manipulation and market misconduct, Umar says Bursa knows who the syndicates are, and it is always watching.

“Again, I would like to reiterate that I want everyone to be interested in the stock market. The stock market was dead because people didn’t think it was a place to invest. Average daily trading value doubled last year. Why? Because there is a rising interest and call to action. What I now want to see is the return of profitability among the listed companies. That is the key to drive investors’ appetite further.

“What I don’t want to see is that someone has taken a position, then writes something in the chat rooms and makes people think this is a hot stock. We have a team of people, supported by a very intelligent software with a little bit of artificial intelligence in it, that is constantly learning and looking at trading behaviour. If it draws attention, then there will be human intervention,” says Umar.

 

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