SINGAPORE Singapore Exchange Ltd (SGXL.SI)'s role as the city-state's equity market regulator is coming under increasing scrutiny in the fall-out from a penny stock crash earlier this month.
The sudden implosion of Blumont Group Ltd (BLUM.SI), LionGold Corp (LION.SI), and Asiasons Capital Ltd ASNS.SI - after huge run-ups in their share price earlier in the year had turned them briefly into billion dollar companies - left many in the market mystified and raised question marks over whether the exchange missed red flags and was too slow to act.
The Monetary Authority of Singapore (MAS) has now stepped into the fray and confirmed on Thursday that a review into what went on was taking place.
Experts say one thing it should look at is whether the bourse is able to manage conflicts of interest between its role as both market operator and watchdog.
"The exchange has to focus on profit for shareholders, meaning they have less time for regulation," said Jimmy Ho, president of the Society of Remisiers who works for brokerage UOB Kay Hian.
Singapore is sensitive to anything that could tarnish its reputation for strong corporate governance, effective regulation and low levels of crime and corruption, which have helped it develop into one of Asia's major financial centers.
The saga also poses a threat to the exchange's long-running push to increase revenue by boosting its trading volumes among retail investors.
"It will basically deter people from investing in this asset class (the penny stocks) for now at least," said Kevin Scully, executive chairman and founder of equity research firm NRA Capital.
"You can compare it to the S-chips where we had a spate of frauds," said Scully referring to the string of blow-ups at locally-listed Chinese stocks in 2008 and 2011, that deterred many retail investors from the market.
Blumont, Asiasons and LionGold have all denied any wrongdoing and there are no allegations of fraud in their cases.
The most actively traded stocks are often the penny stocks which attract little institutional interest. At the same time, SGX has not seen many major big-ticket listings for a number of years and the growth of Singapore's equity market has lagged the growth of the city-state as a major wealth management, foreign exchange and commodities trading hub.
That has led to concerns that the exchange could face pressure to lower standards in order to boost its bottom line.
MAS said last week that it and SGX would look into wider issues that have surfaced regarding "market structure and practices". The central bank did not elaborate on what that would involve, but said it would issue a public consultation if it decided to make any changes.
Many countries including Hong Kong, Australia and the United States have an independent securities regulator overseeing the stock market, a separation aimed at ensuring potential lost revenue is not a consideration when enforcing rules.
In Singapore, SGX performs the front-line regulatory role and the bourse in turn is regulated by MAS. The exchange has a special committee to deal with conflicts of interest its dual role can pose.
SGX said earlier this year that it believed the current system was best for the local market and its proximity to the market helped it understand its users' compliance issues.
It has responded to some of the criticism facing it, saying that it deployed a series of tools to restore stability to the market when the stocks began to fall and that it uses separate measures to investigate possible wrongdoing.
"SGX devotes significant resources into detecting and investigating market misconduct and works closely with statutory authorities against offenders of the law," the exchange said in a statement.
Shares in natural resources investment company Blumont, alternative investment firm Asiasons and gold miner LionGold raced higher earlier this year, before crashing in a frenzied 40 minutes of trading on Friday October 4. The shares were suspended, but tumbled further when trade resumed the next Monday.
The three stocks lost more than S$8 billion ($6.47 billion)in combined market value in less than two days of trade. Before that, Blumont's share price had risen more than 1,000 percent since the start of the year.
Some brokers in Singapore had put trading restrictions on the stocks during September due to concerns that their value was no longer matched by the fundamentals.
SGX did not put in place trading curbs until after the stocks started to fall, causing complaints that it acted too late.
The exchange was not oblivious to the companies' price rises - it queried Asiasons and Blumont twice and LionGold once in the weeks leading up to the crash, moves that SGX says should act as red flags to investors.
Some corporate governance experts say they are concerned, though, that the need for such queries is on the rise, and there needs to be closer examination of what companies are doing.
"I have noticed that unexplained price run-ups seem to have become more common place, and queries sometimes result in a disclosure that a deal is being discussed but not certain," said Mak Yuen Teen, associate professor at the National University of Singapore (NUS) Business School, without commenting on the stocks involved.
"This raises the issue of possible insider trading by someone with knowledge about the transaction - for example a banker or lawyers, and their tippees".
Blumont and Asiasons both responded to at least one of the queries put to them that they were in discussions on potential deal opportunities, though nothing was confirmed. Both the companies have denied any wrong-doing.
LionGold said it trusted MAS and SGX to investigate the matter.
"As far as we understand from press articles on the matter, MAS is investigating the trading activities surrounding LionGold's shares and not on the company's operations," it said in a statement on Friday.
The exchange and MAS said they were unable to publicly address whether market manipulation could have been behind the stocks' wild price swings, as it could hinder any investigations.
That is not removing pressure for them to be more open about the way such cases are investigated in general.
"I personally would like to see more transparency in relation to enforcement, including capacity, resources, number of queries, number of cases investigated, number of cases dropped, number in progress and so on," said Mak at NUS Business School. "At the moment, everything is too much of a black box."
($1 = 1.2369 Singapore dollars)
(Additional reporting by Eveline Danubrata in Singapore and Clare Baldwin in Hong Kong; Editing by Alex Richardson)