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Don’t be fooled by the high trading volume

Publication Date : 23-08-2014

 

Last week a broker got an order from a client who has not bought or sold shares for the past three years. The client, who is retired, placed an order to buy shares in Sumatec Resources Bhd at 61 sen.

Sumatec was among the few stocks that saw heavy volume being traded last week. The broker advised the elderly man that he should not be taken in by the euphoria that the market had seen last week, with trading volumes hitting record high of more than 7.6 billion shares in a single day.

Apart from Sumatec, the bulk of the shares were traded in two other stocks, namely, Globaltec Formation Bhd and PDZ Holdings Bhd. \

The three stocks have a combined market capitalisation of 2.6 billion ringgit (US$822.5 million), which is a fraction of the entire market capitalisation of Bursa Malaysia that stood at 1.76 trillion ringgit ($556.8 billion) yesterday.

The elderly retail investor did not listen to the broker’s advice. Sumatec ended at 45 sen that day. Now, the retail investor has to wait for Sumatec to recover or lose a few thousand ringgit if he chooses to sell.

The large trading volumes of stocks should not be a reason for retail investors to invest in stocks.

Fundamentals should be the primary reason. The large volume is a game for a select group of market participants called proprietary day traders, or better known as stockists.

There are about 80 of them attached to various brokerages in Bursa Malaysia. Their job is to trade for the brokerage as principals. They don’t have any clients. The stockists can buy and sell as much as they want in a day. There is no limit imposed.

They are not imposed any brokerage fees but have to pay stamp duty and clearing fee to Bursa Malaysia based on the value of trades done. The duty is capped at 250 ringgit ($79.10) or less, while the clearing fee is minimal.

A brokerage will normally place their stockists in a room where they conduct their buying and selling operations with minimum disruptions. Even phone calls are restricted.

The stockists can short-sell stocks without having the shares in hand. But they have to cover their positions by buying back from the market before the end of the day’s trading.

The profit from buying and selling are shared between the brokerage and the stockist. Normally 60 LAST week a broker got an order from a client who has not bought or sold shares for the past three years. The client, who is retired, placed an order to buy shares in Sumatec Resources Bhd at 61 sen.

Sumatec was among the few stocks that saw heavy volume being traded last week. The broker advised the elderly man that he should not be taken in by the euphoria that the market had seen last week, with trading volumes hitting record high of more than 7.6 billion shares in a single day.

Apart from Sumatec, the bulk of the shares were traded in two other stocks, namely, Globaltec Formation Bhd and PDZ Holdings Bhd. The three stocks have a combined market capitalisation of RM2.6bil, which is a fraction of the entire market capitalisation of Bursa Malaysia that stood at RM1.76 trillion yesterday.

The elderly retail investor did not listen to the broker’s advice. Sumatec ended at 45 sen that day. Now, the retail investor has to wait for Sumatec to recover or lose a few thousand ringgit if he chooses to sell.

The large trading volumes of stocks should not be a reason for retail investors to invest in stocks. Fundamentals should be the primary reason. The large volume is a game for a select group of market participants called proprietary day traders, or better known as stockists.

There are about 80 of them attached to various brokerages in Bursa Malaysia. Their job is to trade for the brokerage as principals. They don’t have any clients. The stockists can buy and sell as much as they want in a day. There is no limit imposed.

They are not imposed any brokerage fees but have to pay stamp duty and clearing fee to Bursa Malaysia based on the value of trades done. The duty is capped at RM250 or less, while the clearing fee is minimal.

A brokerage will normally place their stockists in a room where they conduct their buying and selling operations with minimum disruptions. Even phone calls are restricted.

The stockists can short-sell stocks without having the shares in hand. But they have to cover their positions by buying back from the market before the end of the day’s trading.

The profit from buying and selling are shared between the brokerage and the stockist. Normally 60 LAST week a broker got an order from a client who has not bought or sold shares for the past three years. The client, who is retired, placed an order to buy shares in Sumatec Resources Bhd at 61 sen.

Sumatec was among the few stocks that saw heavy volume being traded last week. The broker advised the elderly man that he should not be taken in by the euphoria that the market had seen last week, with trading volumes hitting record high of more than 7.6 billion shares in a single day.

Apart from Sumatec, the bulk of the shares were traded in two other stocks, namely, Globaltec Formation Bhd and PDZ Holdings Bhd. The three stocks have a combined market capitalisation of RM2.6bil, which is a fraction of the entire market capitalisation of Bursa Malaysia that stood at RM1.76 trillion yesterday.

The elderly retail investor did not listen to the broker’s advice. Sumatec ended at 45 sen that day. Now, the retail investor has to wait for Sumatec to recover or lose a few thousand ringgit if he chooses to sell.

The large trading volumes of stocks should not be a reason for retail investors to invest in stocks. Fundamentals should be the primary reason. The large volume is a game for a select group of market participants called proprietary day traders, or better known as stockists.

There are about 80 of them attached to various brokerages in Bursa Malaysia. Their job is to trade for the brokerage as principals. They don’t have any clients. The stockists can buy and sell as much as they want in a day. There is no limit imposed.

They are not imposed any brokerage fees but have to pay stamp duty and clearing fee to Bursa Malaysia based on the value of trades done. The duty is capped at RM250 or less, while the clearing fee is minimal.

A brokerage will normally place their stockists in a room where they conduct their buying and selling operations with minimum disruptions. Even phone calls are restricted.

The stockists can short-sell stocks without having the shares in hand. But they have to cover their positions by buying back from the market before the end of the day’s trading.

The profit from buying and selling are shared between the brokerage and the stockist. Normally 60 per cent goes to the brokerage and the trader gets 40 per cent. However, an “ace stockist” can command up to 90 per cent of the profits. But the stockist has to absorb all the losses.

Normally, the brokerage will hold the profits of the stockist and pay out only after a year. An ace stockist can earn 10 million ringgit ($3.16 million) or more a year by just being a principal stockist for the company.

But there are limitations to what a stockist can do to generate the volume of stocks. They generally shy away from stocks that are more than 1 ringgit and that have a small paid-up capital.

Apart from having to incur a higher clearing fee, normally stocks that are held tightly tend not to have enough shares in the market to generate the volume without causing a substantial rise in the price.

The typical targets for a stockist are stocks that are priced at less than 1 ringgit and that have a large share capital. For instance, Globletec Formation, which is an amalgamation of three stocks that were involved in manufacturing automotive components, has a capital of more than 5 billion shares.

Some companies like to see the activities of the stockist because it supposedly adds excitement to the market, not to mention to the stock as well.

But there is also a view that the stockists hold an unfair advantage over the normal investors because they can short a stock or take long positions several bids higher.

This allows a few stockists to “gang up” and deliberately cause a panic sell-down of a particular stock.

In jurisdictions such as Hong Kong, while short-selling is allowed, there are rules that prevent deliberate sell-downs.

Anyway, this volume game of trading in stocks is not for retailers. It is only for the traders of the market where the risk and returns are high.

For retailers, ultimately value investing is the game. Value stocks may not have the kind of volume one would like to see nor would it be cheap. But it attracts the kind of investors who generally take a long-long term view.

Berkshire Hathaway Inc, the flagship listed entity of Warren Buffett crossed the US$205,000 per share mark last week, making it the highest-priced stock on the New York Stock Exchange.

Despite calls from shareholders to split the stock, Buffett has stayed firm in refusing to undertake such an exercise on the grounds that it would attract a “different breed” of investors that he does not fancy.

A hard-to-trade stock encourages investors to take a long-term view and cuts out those trading on emotions.

This is something retail investors should take heed of. The volume game in trading stocks is not their cup of tea. It is only for a select few. 

 

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