NY Times: Thailand Tries to End Stock Speculation
New York Times March 9, 2004
Thailand Tries to End Stock Speculation
By WAYNE ARNOLD
Less than three months after Thailand's cabinet appointed him secretary general of the nation's Securities and Exchange Commission, Thirachai Phuvanat-naranubala is already leaving his mark on the country's booming stock market.
Yesterday, Mr. Thirachai imposed new rules on stock trading that he hopes will end roller-coaster market swings caused by what he and others in the government and securities industry say is stock-price manipulation and insider trading.
"My idea is to introduce more order into the market," Mr. Thirachai said in a telephone interview from his office in Bangkok. "I want to make sure the stock market can be a place where people can invest without having to be close to these insiders or have their ear glued to the rumor mill."
After its benchmark index more than doubled last year, Thailand's stock market has become increasingly turbulent, with trading volumes more than quadrupling. Such blistering activity has been a boon to brokerage commissions. Prime Minister Thaksin Shinawatra, however, has complained that too much of the activity comes from day traders using rumors to push stock prices to unrealistic levels. The new rules are aimed at limiting the abuses.
The concern among regulators and economists is that after 30 years, the Stock Exchange of Thailand is still little more than a casino. Short-term stampedes, potentially devastating to any small savers who venture into the market, they say, also risk diverting investors from deserving companies seeking to raise funds.
"We call it 'misallocation of capital,' " said Therapong Vachirapong, an analyst at Phatra Securities in Bangkok.
"Misallocation of capital'' has an ominous ring in Southeast Asia: it was blamed for creating the investment bubbles that presaged the financial crisis of 1997 and 1998.
Before, family-run banks lending to affiliated companies were the biggest culprits. Now Thai authorities are trying to promote the stock market to reduce what economists have long said is an overreliance on banks for corporate financing. The government of Thailand has established education programs to encourage stock ownership and has created mutual funds to turn more depositors into shareholders.
Together with the stock exchange, the government has created tax incentives to encourage companies to list their shares. Combine that with buoyant stock prices, and companies appear to be responding. The investment bank UBS estimates that Thai companies will seek to raise roughly $4 billion this year on the exchange.
Many are state-owned enterprises, like the Electricity Generating Authority of Thailand, which Mr. Thaksin is trying to privatize - over protests from the employees of the utility. The authority plans to raise 70 billion baht ($1.76 billion) this year selling shares to the public.
So far, there is little evidence that day trading has had any impact on the ability of companies to sell new shares. Thai companies sold $4.8 billion in new stock last year, according to UBS. Last week the government sold 30 percent of the Airport Authority for 17.33 billion baht in an initial public offering.
Still, Mr. Thaksin has pressed the commission to curb speculators. Last year, Mr. Thirachai's predecessor imposed a rule that as of April 1 will require investors to deposit at least 10 percent of the amount of their purchase orders with brokerage firms. Mr. Thaksin condemned the rule as too broad, but Mr. Thirachai has decided to keep it.
"The 10 percent collateral rule will make it more difficult for these big players to try to split up their accounts and place their orders with many brokers to make it look like they're not the same party," he said.
Thailand's moves to keep its stock market from boiling over are also part of a broader effort to keep the country's economic boom from creating the kind of asset bubbles that preceded 1997's crisis. So far, the economy appears unfazed. With consumer spending and exports setting records, Thailand's economy is expected to expand by 8 percent this year. Moody's Investors Service last year raised the country's benchmark rating to the same level as Thailand's more developed neighbor, Malaysia.
Mr. Thirachai, 52, took over the commission on Dec. 26. A graduate of the London School of Economics and a former central banker, he made headlines for urging caution during the expansion of Thailand's financial sector in the early 1990's.
He took over an agency with a short, but inauspicious, history. Established 12 years ago, the securities commission has been struggling to check the ability of Thailand's wealthiest politicians and business executives to control the stock market. Most of its cases against suspected manipulation, however, have foundered in Thailand's notoriously labyrinthine courts.
One of its most famous investigations, interestingly, was of Mr. Thaksin, the tycoon turned politician who in his victorious 2001 campaign was accused of trying to disguise his wealth by holding stock through members of his family. The commission cleared Mr. Thaksin of any wrongdoing.
Mr. Thaksin's principal complaint centers on the popularity of day trading, which accounts for as much as 40 percent of any given day's activity. The most common abuse, brokers say, is a practice called ramping. Using either a news item or a rumor, investors start buying a company's stock, and the mere trading volume is sometimes enough to attract other investors looking to catch a fast ride up. "They start the buying and get the price rolling and spread the news," Mr. Thirachai said.
Those who get in early on the buying can sell the stock later in the day to latecomers for a quick profit. When the news is ultimately discounted or the rumor dispelled, these unwitting investors are stuck with losses.
Mr. Thirachai says the popularity of day trading is a huge liability for the brokerage industry. Many day traders invest with little or no money on deposit at their brokerage firm and, if they end the day with losses, sometimes ignore requests to pay the brokerage firm.
The new rules are intended to reduce the ability of professionals to ramp up stock prices. As of yesterday, they must pay upfront for any stock in which trading for a given week has exceeded the number of shares listed on the exchange. In addition, they will be prohibited from buying on margin any stock that has reported a loss or with a stock price at least 100 times its earnings per share.
With the new rules in place, Mr. Thirachai promises that his days of restricting trading are finished. He said he planned to turn his attention next to the way Thailand's companies are run. "The only measures I'll be producing are on corporate governance," he said.
