Bursa Malaysia has stated that it will be introducing Trading Reminders, a new tool that highlights unusual trading activity in addition to queries issued over spikes in prices and volumes.
There have been instances where share prices and volumes remain volatile, despite companies replying that there were no new developments to the unusual market activity (UMA) queries, Bursa said in a statement.
This is understandable as prices move due to shareholder action and not the company's action (unless it is share buybacks). It is trite company law that the shareholders and the company are separate legal entities.
"The Trading Reminder flag aims to alert investors to exercise caution when encountering a stock displaying persistent unusual price and/or volume movements after the listed company's UMA response," the local bourse operator added.
In the past, the exchange will issue a Market Alert for such counters – now such counters are going to be flagged. This is immediate notification for investors to exercise due diligence when investing in such counters.
A Market Alert is an alert initiated to caution the investing public on possible irregular trading activities of a particular security. Investors will welcome this flag.
The latest initiative complements the existing multi-pronged approach to market regulation to protect investors, including engagement with participating organisations to address irregular trading concerns, Bursa noted.
UMA refers to significant deviations from the normal trading patterns of stocks. This can manifest as sudden spikes in volume, price swings, or both, and is often indicative of underlying events or anomalies in the market. Understanding the causes of UMA and implementing measures to prevent it is crucial for maintaining market stability and investor confidence.
There are many causes of Unusual Market Activity.
Market Manipulation
Market manipulation involves deliberate actions by individuals or groups to artificially influence the price of a security. This can include practices like pump and dump schemes, where the price of a stock is artificially inflated before being sold off, or spoofing, where large orders are placed and then cancelled to create a false sense of demand or supply.
Algorithmic Trading
The rise of algorithmic trading, where computer algorithms execute trades based on predefined criteria, can lead to UMA. These algorithms can react to market conditions at lightning speed, potentially causing rapid price movements. Flash crashes, where markets suddenly plummet and then recover quickly, are often attributed to high-frequency trading algorithms.
Insider Trading
Insider trading occurs when individuals with non-public information about a company trade its stock. This can lead to unusual volume and price changes before the information becomes public. Regulatory bodies closely monitor trading patterns to detect such activities.
Market Sentiment and Herd Behaviour
Investor psychology plays a significant role in UMA. Herd behaviour, where investors follow the actions of others rather than their own analysis, can amplify market movements. Panic selling during a downturn or exuberant buying during a rally can create volatility and unusual activity.
Technical Factors
Technical factors, such as margin calls or stop-loss orders, can also trigger UMA. For example, a sharp decline in a stock's price may trigger stop-loss orders, leading to further selling and exacerbating the price decline.
There are ways to prevent Unusual Market Activity
Enhanced Regulation and Surveillance
Regulatory bodies like Bursa Malaysia and the Securities Commission (SC) play a crucial role in monitoring and regulating market activities. Enhanced surveillance systems that use advanced algorithms and artificial intelligence can detect suspicious trading patterns and flag them for further investigation.
Transparency and Disclosure
Ensuring transparency and timely disclosure of material information is vital. Companies must adhere to strict reporting standards and disclose relevant information to the public promptly.
This reduces the likelihood of UMA caused by sudden information asymmetry.
Stricter Penalties for Manipulation
Imposing stringent penalties for market manipulation can deter potential wrongdoers. This includes hefty fines, banning individuals from trading, and even criminal charges for severe violations. Publicising these penalties can also serve as a deterrent to others.
Regulating Algorithmic Trading
Regulating algorithmic and high-frequency trading is essential. Bursa Malaysia has circuit breakers, which temporarily halt trading if prices move too quickly and can prevent flash crashes. Requiring algorithms to be registered and tested before deployment can also help mitigate risks.
Education and Investor Awareness
Educating investors about the risks of herd behaviour and the importance of due diligence can reduce the impact of emotional trading. Financial literacy programs can empower investors to make informed decisions and avoid panic-driven actions.
Robust Risk Management Practices
Financial institutions and trading platforms should implement robust risk management practices. This includes stress testing their systems, maintaining adequate capital reserves, and ensuring that margin requirements are appropriate. These measures can help absorb shocks and maintain market stability during periods of high volatility.
Real-Time Data Analytics
Leveraging real-time data analytics can provide insights into market trends and potential risks. Advanced data analytics tools can identify unusual patterns and predict potential UMA, allowing for proactive measures to be taken.
Collaboration Among Market Participants
Collaboration among exchanges, regulators, and market participants is crucial. Sharing information and best practices can enhance overall market resilience. Regular communication and coordinated actions during periods of UMA can help stabilise markets and restore investor confidence.
Unusual market activity is an inherent aspect of financial markets, driven by various factors ranging from news events to market manipulation. While it cannot be entirely eliminated, implementing robust regulatory frameworks, enhancing transparency, educating investors, and leveraging technology can significantly mitigate its occurrence and impact.
Ensuring a fair and stable market environment is essential for maintaining investor trust and fostering long-term economic growth.
As for the Trading Reminder flag, it is a call to exercise increased diligence and awareness when making the informed investment decisions.
*The writer is a former chief executive officer of Minority Shareholders Watch Group and has over two decades of experience in the Malaysian capital market.