New limits for online traders to feed speculation

Regulators need to be on the ball to ensure the market does not deteriorate into a casino-like situation


WHILE the real economy may be under some stress, the financial markets are in a sweet spot with ample and cheap money flowing in. Volume tends to beget volume and its great business for exchanges and brokers.

The benchmark FTSE Bursa Malaysia KLCI is up almost 30% to 1,561 points since testing a low of 1,207 in March, as the market has become immune to the various risk factors and the virus.

It is now routine for daily total transactions on Bursa Malaysia to cross the seven billion mark as opposed to the two to three billion trades done in the pre-Covid-19 pandemic period. Some 8.2 billion securities worth RM6.1 billion were traded yesterday alone.

Much of the rise in volume and value is backed by fresh money as the more than doubling in average value of daily trade indicates.

Now, the Securities Commission Malaysia (SC) intends to put the market euphoria among retail traders on steroids by doubling the trading limit for online retail accounts.

The limit on online accounts could rise to RM100,000 in the second half of the year from RM50,000 currently, according to a Bloomberg report quoting the SC chairman.

The move will have its critics saying that the limit will feed the speculative trading among them as it would create further credit for account holders, something a lot of traders would we come in this liquid and volatile market despite the risk involved.

For seasoned traders with a good understanding on the workings of the local market, the move will enhance their financial means in the market.

The fear is for the novices who have just joined the online traders/investors family, as the move could really backfire if their positions go wrong.

The herd mentality is alive and well in the current marketplace.

Many of these people would not be aware that much of the trading volume in penny stocks on the local exchange on a daily basis is due to churning by propriety/intraday traders, who can make money off the half-sen price spread at their expense.

The proposed higher trading limit will also require the risk management department of brokers to be much more vigilant should the brokerages back the SC’s move and extend extra margin financing.

Attempts by some brokerages to manage their risk exposure by curtailing margin financing facilities on rubber glovemaker stocks since early this week have not stopped investors and traders from piling back into the stocks, never mind the lofty valuations for most of the counters.

The Covid-19 pandemic and the resulting home confinement under the Movement Control Order has helped trigger a resurgence of interest in trading and investing on local exchanges, which is a healthy thing for the market, and will potentially help bump up the economy through the wealth effect.

While a fair amount of speculation is necessary for a healthy market environment, the market regulators need to be on the ball to ensure the market does not deteriorate into a casino-like situation with syndicates and other forces starting to manipulate prices.

Bhupinder Singh is the corporate desk editor of The Malaysian Reserve.