Hong Kong’s financial regulators and market supervisors are closely monitoring the stock exchange for unusual price and volume movements to prevent market manipulation via social media, stepping up their vigilance in a market that mostly operates with few brakes on.
“We understand that the Securities and Futures Commission (SFC), as the regulator of the Hong Kong securities market, has taken [some] follow-up actions on the principle of safeguarding investor interest,” a spokesman for the Financial Services and the Treasury Bureau said in response to inquiry by the South China Morning Post.
The alert follows several weeks of frenzied trading in the US stock market, where armies of retail traders on zero-commission platforms such as Robinhood were egged on by chat groups on the Reddit social media network to buy shares of GameStop and AMC Entertainment Holdings, in defiance of short-sellers in the so-called “nerds vs Wall Street” battle. Shares of GameStop, a left-for-dead speciality games distributor, jumped almost 50-fold from last year’s average US$7 per share to a January 27 record of US$347.51 before crashing to US$90 over four trading days.
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The price gyrations made many amateurs traders rich, but saddled more of them – late comers who bought the stock when it had already soared – with losses when prices came crashing. The battle, lionised around the world on social media as a David-versus-Goliath battle between Generation Z traders and Wall Street bankers, is showing signs of being followed elsewhere.
Shares of oversold gaming stocks in mainland China surged last week, while heavily short-sold stocks in Australia, including a company with GME as its ticker symbol, jumped by as much as 60 per cent, according to Bloomberg.
Retail investors on the Kuala Lumpur exchange banded together in the Bursabets chat group – with 7,600 members as of last week – on social media to snap up shares of Malaysian glove makers. Shares of Top Glove, the biggest producer, surged 15 per cent in a declining market, before giving back some of the gains. Rival Hartalega Holdings jumped 5.4 while Supermax rose 3.7 per cent in a day.
The copycat stock pushers got regulators sufficiently concerned that the monetary authority and securities watchdog agency of neighbouring Singapore urged investors to be on “heightened alert to risks [of] trading in securities incited by online discussion forums and social media chat groups.”
“The SFC is in close dialogue with local and overseas regulatory counterparts about investor risks in volatile stocks, and will work to ensure fairness and orderliness in our markets,” the regulator said in statement. “The SFC will not hesitate to take regulatory action if there is evidence that intermediaries are not acting in the best interests of their clients and the integrity of the market.”
The tactic had already worked in Hong Kong last August, when the stock of Next Digital Limited jumped 1,200 per cent over two days following calls on Facebook and Twitter to support the publisher of the Apple Daily newspaper. A month after Next Digital’s price gyrations, Hong Kong police arrested 15 people on suspicion of conspiracy to defraud by manipulating shares of the company. Thy allegedly pocketed HK$38.7 million in profit from 13,200 transactions involving 1.69 billion shares worth HK$1.5 billion (US$193.5 million).
Hong Kong law requires individuals who proffer paid investment advice to be licensed, but it does not prohibit the sharing of investment-related information via social media among friends and families in a non-business context, said Stephen Chan, a partner of the legal firm Dechert.
“We monitor market activities to maintain and promote fairness and orderliness in our markets,” said an SFC spokesman.
The SFC repeatedly warned the market about investment risks from “pump and dump” activities after the police arrests in September, highlighting scams such as fraudulent investment classes and impostors posing as famous investment analysts with insider information.
The SFC warned on investors to beware of the risks of trading in highly volatile overseas stocks as their brokers may suspend their trading or add in margin requirements. “In this situation, investors may not be able to open new positions or close out existing positions, which may result in unexpected losses within a short period,” the SFC said in its Wednesday statement.
Online investment scams accounted for about 20 per cent of all market manipulation cases under investigation by the SFC, the regulator said in September.
“Cracking down on investment fraud and scams on online platforms is a high priority,” the SFC’s chief executive Ashley Alder said during a Monday meeting with members in Hong Kong’s legislature, adding that commission froze huge sum of money in a number of securities accounts related to these scams.
Market manipulation and scams are particularly dangerous on the Hong Kong bourse, a 130-year-old financial marketplace best known for its light-touch regulations and freely moving prices. The Hong Kong stock exchange did not have any controls of circuit breakers that can suspend trading during sudden movements until 2016, in stark contrast to the limits operating in mainland China, Japan, Singapore and the US for decades.
Even when the HKEX did introduce a volatility control mechanism in August 2016, it covered only the 82 largest stocks, later expanded to cover 492 stocks in May 2020. That left more than 2,000 stocks – including Next Digital – with no price control that could slow their surge, or crash.
The mechanism, which halts trading in a stock for five minutes in the event of a sudden jump or tumble – defined as between 10 per cent and 20 per cent within five minutes – was triggered 21 times since its launch
Market manipulation of GameStop’s magnitude would not occur on the Shanghai or Shenzhen stock exchanges, where prices are capped by 10 per cent limits in either direction.
“It is time to review whether we should have some short circuit measure in place for small stocks to enable some cool off opportunity for the market in extreme circumstances,” said Clement Chan, a non-executive director of the SFC and managing director of the accounting firm BDO.